Last week we looked at the areas of opportunity in the pharmaceutical industry. This week, we’re taking a closer look at three companies with promising products and development programs in the big pharma space.
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Astrazeneca
Its history of commercialising its extensive research program is impressive. That’s helping it plug the gap from falling sales of COVID-19 medicines with higher value speciality medicines.
Cancer treatments are a cornerstone of Astrazeneca's offering. Its Dato-DXd program, which has been co-developed with Japanese company Daiichi Sanko, is designed to deliver chemotherapy more efficiently to tumour cells. We could see this start adding to revenues.
Dato-DXd has been estimated to have the potential to generate peak sales of $18bn. Given the drug is yet to be authorised for any conditions, there’s still a mountain to climb to achieve this. All eyes will be on key data read outs in late October.
Immunotherapy is another key weapon in Astrazeneca’s armoury against cancer, with Imfinzi sales growing over a fifth last year to $2.8bn. It’s another product that could be said to have its own pipeline with multiple combination and monotherapy trials underway for several conditions.
Aside from cancer treatments, respiratory and auto-immune diseases are also significant areas of research, as are rare diseases. Such a research pipeline doesn’t come cheap, so we’d like to see some more progress on paying down debt.
The valuation is a little below the long-term average, which we don’t think fully reflects the exciting outlook for the pipeline. However, the potential loss of revenue from patent expirations over the coming years still means there’s pressure to deliver.
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Novo Nordisk
Novo Nordisk was first to market with Wegovy, its once-weekly GLP-1 therapy for weight management. It’s no longer the only game in town, but such is the booming demand for this category of product that it’s still driving impressive growth.
This year sales are expected to grow between 27-33%, and operating profits 31-37%. Right now, GLP-1 therapies make up around half of group revenues and the majority of that is for Ozempic which is only authorised for Type 2 Diabetes.
Last year, weight-loss treatments generated revenue of about $2.4bn for Novo. And with a potential market size of up to $100bn, we think there’s plenty of room for more growth, despite emerging competition in the space.
The market’s been impressed with the growth seen so far. That’s earnt Novo a valuation towards the top of the peer group which increases the likelihood of volatility.
For now, the key constraint to growth looks to be manufacturing bottlenecks. While it’s taking some action, there are still some issues to resolve.
The pipeline and product range aren’t as diverse as the other two companies we're looking at here. The key driver of investment sentiment for now is likely to be the outlook for the GLP-1 portfolio. But there are some concerns about long-term safety, as well as disputes about the company’s patents.
But Novo isn’t just a one-trick pony. It’s already a leading producer of insulin-based treatments. And while existing insulin medicines face political pressure over pricing, the potential launch of its once-weekly icodec could bring insulin back into the spotlight. Regulatory approval is the next hurdle.
Novo also has a rare diseases division which it built up through acquisitions, and only recently has it gotten US approval for Rivfloza to treat a rare genetic kidney condition. Strong cash flows and a strong balance sheet have let deal-making continue, more recently with complementary companies in the diabetes and weight management arenas.
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Sanofi
Sanofi already has one of the biggest global sellers in immunology with Dupixent® which is currently authorised to treat five conditions, including Eczema and Asthma. We see this product as a potential pipeline, particularly with last year’s annual report confirming that Dupixent® was being investigated for over six new uses.
Revenues for Dupixent® were up 58% last year to €8.3bn, but at 19.3% of total sales, it’s far from the only medicine on Sanofi’s shelf. With the portfolio dominated by high-value speciality medicines, Sanofi makes a healthy profit from its operations. And free cash flows of €8.5bn in 2022 gives us some comfort that its net debt of €6.4bn at the year-end, is manageable.
It also gives Sanofi the firepower to forge partnerships with other players pursuing research programs of interest. Examples include the recently announced $1.5bn deal with Teva, to develop a treatment for inflammatory bowel disease.
It's also making headway in cancer immunotherapy after raising €900m by out-licensing Libtayo. This is a potential competitor to Merck’s blockbuster drug Keytruda and Sanofi still maintains an interest through a royalty agreement.
At the same time, it’s chosen to take on some more novel immunotherapy candidates through its $1.4bn tie up with Innate Pharma.
Of course, as with all drug development, there’s a significant risk these medicines won’t make it to market. But with 78 clinical projects on the go, Sanofi isn’t keeping all its eggs in one basket. Other areas of focus include neurology, vaccines and rare diseases.
Given the depth of the portfolio, we don’t think the valuation looks too demanding. It also appears less exposed than some to patent expirations on key products. And while pharmaceutical research has the scope to generate disappointment, the shares also carry a prospective dividend yield of 3.8%.
Forecasted dividends look to be well covered by earnings currently, but there can be no assurances that any payout will be made. Remember, yields are variable and no dividend is ever guaranteed.
Overseas dividends can be subject to withholding tax which might not be reclaimable.
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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated, estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates aren’t a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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