Tuesday, January 26, 2010

DDP 2010: Annual Wall Street Address: Retrospective View Over the Past Twelve Months

Annual WALL ST ADDRESS: Retrospective View Over the Past Twelve Months: Analyze the Economy’s Affects on Pharma and Drug Delivery and Prepare with an Outlook for the Future

David Steinberg, Managing Director, Equity Research, Specialty Pharmaceuticals and Drug Delivery
Deutsche Bank

The last two years has been interesting and stressful. Things are improving, but it is not clear or not if we are out of the recession. The year is looking up. As for healthcare, in 2008, pricing environment was reasonable and robust, international Rx growth was accelerating. In those stocks, smaller and risky companies weren’t doing well.

Why were healthcare stocks failing to perform?
-Investors were in trouble.
-Credit markets effectively shut down
-Equity financing was virtually non-existent
-There was a torrent of mutual funds and hedge fund redemption
-Smaller companies bore the brunt of the carnage

In 2008 there were 0 IPOs, in 2009, there were only two. Many companies no longer had to accept financing. Over 180 companies had less than one year’s cash. Now we were looking at a situation where hundreds of companies might go bankrupt.

Rabid Consolidation is a key theme in Pharma sector. There is an unprecedented amount of activity. There were 27 mergers in 2009, 4 were drug delivery companies.

-The bigger the company is the more likely they’re not going to have a great product pipeline.
-It’s a great exit strategy for private companies.
-Purchases of closely held companies to provide liquidity to a concentrated shareholder base

Who are the buyers? Usually we see branded specialty companies, generic companies, big Pharma, and private equity.

Who are the sellers?
-Profitable companies that have competitive/sustainability/critical mass issues
-Developmental state companies with attractive late-state pipelines that require major funding to market new products/receive FDA approval for both
-Special situations – attractive product partnership economics
-The “sweet spot” – profitable companies with market values between $750 mil and $5 billion

Stock Performance –
Acusphere, Aradigm, Neopharm, Middlebrook, and many others have had very poor stock performance over the past five years.

Optimized business model (CR model, etc) – stock performance has been very high. Shire, Kos, Adams Respiratory and New River Pharma have done very well.

Live cycle extension products –
-Generic drug companies helped change the rules of the game
-Managed care has caught on the life cycle extension game

How do you outsmart generics? David advised to start with the product idea and work backwards. Also look at what your company’s product strategy is, in addition to creating an opportunity for settlement. They key is to stay ahead of generics.

Unapproved drugs? Changing FDA regulations There are numerous unapproved drugs on the market if a company does clinical trials on it FDA grants exclusivity to the company

Abbott Tricor example great life cycle strategy
Adams Mucinex example Adams pursued NDA on guaifennesin-CR FDA granted exclusivity
Naispan Kos examples Abbott acquired Kos for $3.7B in November 2006
Vyvanse New River example a single enantiomer product of adderal a long lifecycle replacement for short duration $1B ADHD Drug

Some of the key recent launched:
Vyvance – Shire

Favorite Specialty Pharma stocks in 2010
Large cap- Teva Pharma (Teva), Shire Shire (SHPGY)
Mid cap – Bivail (BVF)
Small Cap: MAP Pharma (MAPP), Eurand (EURX)

Modest but prolonged recession? Look at these factors for 2010:
-Investor base
-Regulatory side
-Political side

In 2009, things were very dismal. Now, if a company is looking to borrow money, it is available. The healthcare plan still will be a great influence on how these things work. At the current moment, the stock market could go either way. Companies with strong management teams who are willing to take risks and borrow money, devise some business plans and come up with the right product, they’ll survive and be rewarded with acquisitions and high stock prices among other things.

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