FirstWord List – The key pharma trends of 2014 to date...

With the football (soccer) World Cup entering its pivotal stages in Brazil, it is perhaps appropriate to consider 2014 to date as a game of two halves for the pharmaceutical industry – or its shareholders at least.

Sovaldi brings US drug pricing to the fore...

Sustained investor enthusiasm – which had supported a bull run for the biotech sector stretching back to Gilead Sciences' acquisition of Pharmasset in late 2011 – was knocked off course in March when the key product emanating from that same deal, Gilead's hepatitis C treatment Sovaldi, emerged at the centre of a pricing firestorm in the US.

Notably, concerns about the sustainability of drug pricing stretched beyond Gilead's product to encompass the broader biotech and pharma sectors. While these fears have subsequently rescinded, Sovaldi may yet play a notable role in pushing the issue of pharmaceutical pricing more firmly into the consciousness of US consumers.

US drug pricing as a notable trend during the first half of 2014 did not end with Sovaldi; a number of companies – most notably GlaxoSmithKline – began to see the impact of pharmacy benefit managers choosing to exclude certain drugs from preferred formularies.

...But also redefines the blockbuster launch

The flip side to the Sovaldi narrative is the staggering level of sales for the drug that Gilead is expected to announce later this month when it reveals its Q2 results. As many have noted, Gilead's product is something of a red herring in the broader drug pricing debate; the level of demand for Sovaldi – the real issue for payers rather than its price, argue some – being testament to its significant advancement of the hepatitis C treatment paradigm.

Thus, although Sovaldi was at the crux of a notable biotech sell-off in March, the product's role in redefining expectations for new drug launches helped to drive a recovery in the Nasdaq Biotechnology Index during Q2.

Immuno-oncology continues to feed industry expectation

Supporting continued enthusiasm for the sector is the potential of immunotherapies to transform the cancer treatment landscape and sky-high expectations ensured that the ASCO annual meeting was the most important medical conference in H1 2014. While this year's meeting did not deliver the breakthrough data that ASCO 2013 did, new studies presented in Chicago both confirmed the opportunity of immunotherapies in lung cancer, melanoma and renal cancer, and support the view that expansion into a multitude of other tumour types is feasible.

The immuno-oncology race has delivered its own set of winners and losers over the course of the past six months, with the market rewarding Merck & Co. for accelerating its PD-1 inhibitor pembrolizumab towards approval and punishing Bristol-Myers Squibb for losing the grip on its leadership.

Big Pharma winners and losers

That only three recognised Big Pharma companies have seen their share prices decline year-to-date is testament to the durability of the sector, particularly given widespread talk of a biotech 'bubble' at the end of Q1.

Bristol-Myers Squibb has suffered the most, and has seen its share price decline by 8.9 percent since the end of 2013. Shareholder expectations have risen in the past six months with the company having repositioned itself as a specialty pharma player; sale of its diabetes franchise to AstraZeneca late last year a defining event in this respect.

With around a third of Bristol-Myers Squibb's forecast 2020 sales tied to immunotherapies (Yervoy and nivolumab), however, the perception that it has failed to build on the clear race leadership it developed last year has weighed on its performance year-to-date.

The other two Big Pharma players to deliver share price declines over the course of 2014 are GlaxoSmithKline and Pfizer. Having delivered a raft of new approvals last year, question marks appear to remain over the ability of GlaxoSmithKline to grow its respiratory portfolio, with the UK drugmaker also delivering a handful of disappointing study results during the first half of the year.

While shareholders did not particularly punish Pfizer for failing to acquire AstraZeneca, its decision to pursue the UK player did raise some question marks over its long-term strategy, with CEO Ian Read having spent the past few years telling investors that Pfizer would get smaller before it got bigger. Furthermore, initial financial data for the three corporate divisions that Read may use as the blueprint for his mooted split underwhelmed expectant analysts when provided at the end of Q1.

M&A remains in vogue

On the other hand, Pfizer's pursuit of AstraZeneca acted to boost European pharma stocks in the first half of the year and intersected two integral industry trends of the past six months – M&A and tax inversion.

AstraZeneca has seen its share price up by around 23 percent since the end of 2013, its valuation boosted not only by Pfizer's pursuit, but bullish internal forecasts for its R&D pipeline provided by management as part of the company's bid to retain independence. Key questions for the second half of 2014 concern whether Pfizer will return with a second approach, and whether AstraZeneca can justify its valuation moving forward; investors will need to see tangible evidence of pipeline progress.

Aside from AstraZeneca, the wave of M&A that has swept across the industry has arguably had the biggest impact on large cap specialty players such as Shire and Allergan (both currently positioned as acquisition targets) and Actavis (which recently completed its acquisition of Forest Laboratories).

A notable contrast to Pfizer's efforts in reviving large scale acquisitions among Big Pharma players was the 'asset swap' deal struck between GlaxoSmithKline and Novartis, and the sale of Merck & Co.'s consumer business to Bayer.

Diabetes market continues to fuel strong performances

Among the most impressive Big Pharma growth stocks in the first half, AstraZeneca's performance was only bettered by Novo Nordisk and Eli Lilly, which delivered share price increases of 27 percent and 24 percent respectively.

The respective growth dynamics of each company could not be different. While Novo Nordisk has delivered a consistently strong performance in recent years, Eli Lilly is on the road to recovery – a narrative illustrated by robust share price growth since the beginning of the year, which in turn has been driven by a number of new product approvals and positive late-stage data. Where their paths do cross is the diabetes market, which is poised to remain a key growth segment for the foreseeable future.

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