Breathing new life into pharma

Pharmaceuticals play a vital role both in saving lives and alleviating the effects of debilitating diseases on millions of people. Across the broad pharma sector (including generics, non-orphan drugs and prescription sales), revenues of almost all large firms met or exceeded expectations in the second quarter of 2018.

This growth is not necessarily driven by higher prices, but a raft of new products which are helping to eradicate or prevent some of the world’s rarest diseases. In addition to positive earnings surprises, new drug launches, costs savings and an unprecedented first half-year of clinical data in immuno-oncology have contributed favourably to the performance of a few companies. Combined, these factors have led to some key guidance updates by analysts and helped to lift sentiment.

For large European firms, a weaker euro and a less aggressive drug-price plan from the US administration has brought back some reasons for cheer, despite the recent market correction. After falling for most of 2017 and the early part of 2018, the blended forward earnings-per-share estimate of the Bloomberg EU Pharma aggregate is retracing some of its relative underperformance versus broader indices.

‘Orphan drugs’ is the name given to those treatments and drugs for diseases so rare that companies are unlikely to recoup the research capital invested. According to the Department of Health, in the UK each [rare disease] affects less than 0.1% of the population, however, in total they affect the lives of 3 million people, a significant section of the population whose lives may be substantially improved. The companies that are able to develop those drugs are able to command high prices for treatments, with little competition, and are often incentivised by government policies.

The National Organization for Rare Disorders (NORD) estimates that there are as many as 7,000 rare diseases

The Solactive Pharma Breakthrough Value Index tracks a basket of pharma companies engaged in orphan drugs. It saw year-on-year revenue growth of around 30.5% as of last quarter, clearly supporting the view that orphan drugs are indeed a higher growth sub-sector within pharmaceuticals.

Since the last index rebalance in March 2018, 17 new orphan drugs have entered the market, and over 20% of companies with actively marketed orphan drugs have an orphan drug revenue share of over 80%.

According to EvaluatePharma, a research and data house in the pharma/biotech sector, the launch of novel therapies, including gene and cell therapies, as well as increased access to medicines globally, should also help ensure such ground-breaking drugs continue to be more widely available to successfully treat and manage rare diseases, fuelling further growth in the market. Total prescription sales are expected to reach $1.2 trillion in 2024, of which orphan drugs are expected to account for more than a fifth.

It is also far from a niche area as four out of the big ten pharma companies, such as Roche, Novartis, Shire and Swedish Orphan, continue to market at least 20 orphan drugs each.

Total prescription sales are expected to reach $1.2 trillion in 2024, of which orphan drugs are expected to account for more than a fifth

In terms of risks, there may be pricing pressures from payers and policy makers, but these are here to stay in this sector. In the UK, the National Institute for Health and Care Excellence (NICE) rejected the drug Brineura on the grounds it was too expensive, thereby sending a warning to those developing even pricier treatments. The drug-pricing debate will also intensify ahead of the U.S. midterm elections in November, which will determine who is in control of Congress for the next two years. President Donald Trump's drug-pricing blueprint contains several meaningful proposals, though they fall short of what the Democrats want.

Overall, however, we see strong performance and growth in this sector as being positive for the bottom line, while also delivering huge social benefits to the world in which we live.