As global healthcare continues to grapple with its biggest crisis in living memory, we take a look at three share ideas that could prosper in the healthcare space.
• Jazz Pharma
• Gilead Sciences
Derren Nathan, Head of Equity Research, Hargreaves Lansdown:
“Successful vaccine programs have materially blunted the immediate threat of Covid-19. However, the pandemic has left an unprecedented backlog, not just in elective care procedures, but also in more life-threatening scenarios. The sector’s attractions include exposure to long-term demographic trends like growing populations and increasing life expectancies. Complex regulatory regimes and technical complexity often result in high-profit margins and daunting barriers to entry.
Companies that develop therapies for rare or ‘orphan’ diseases can enjoy further protections and incentives and have been able to charge very high prices. But this comes with lots of risks and costs. Expected US legislation (already ratified by the Senate) means the pricing of new therapies, as well as price rises on existing approved treatments, will come under pressure. The development process is long, expensive and has a low hit rate. Typically, drugs take at least ten years to develop and these costs can push into the billions. Most drugs that make it through pre-clinical evaluation never reach approval.
But the stakes are high. Blockbuster drugs can generate billions of dollars over their lifetime. With significant patent cliffs approaching, the majors are under pressure to replenish their drug portfolios. In an environment where investor appetite to fund clinical trials is waning, companies with strong cash flows and/or balance sheets with diverse development portfolios should be best placed. With that, here’s a closer look at three share ideas that could benefit in the healthcare space.”
“Ireland’s Jazz Pharma hit the headlines with last year’s $7.2bn acquisition of GW Pharma, a UK-based pioneer of licensed cannabis-derived therapeutics. At the half-year mark, Jazz saw revenues grow 24% to $933m. That was dominated by its sleep disorder franchise, which focuses on excessive daytime sleepiness. The cannabidiol products, primarily prescribed to combat seizures, made up under 20% of sales. But with a total of ten new market and indication launches across 2022, they‘re well poised to accelerate.
Jazz also has a rapidly developing cancer franchise, with two products launched since 2020 and another poised to enter first-in-human trials. Jazz is targeting a minimum of five novel product launches by the end of the decade.
In the shorter term, it’s set out a $5bn revenue target for 2025, nearly 40% above the midpoint of 2022 guidance. It’s also targeting a five percentage-point improvement in underlying operating margin. If it can meet these goals, current valuation doesn’t look too demanding. Drug discovery is inherently risky even for late-stage candidates though. And Jazz might have to pedal harder to achieve those margins in the face of inflationary pressures.”
“With recently upgraded 2022 revenue guidance ranging between $24.5bn and $25bn, Gilead Sciences is the most mature of the three companies. It has the additional attraction of being a dividend payer with a prospective yield of 4.7% – remember though, yields are variable and not guaranteed. Gilead does carry substantial net debt of $21.5bn. But it is coming down having already reached its 2022 repayment target of $1.5bn. Gilead was a Covid winner, with its antiviral Remdesivir (branded Veklury). Sales of Veklury are now falling rapidly from their peak, at about 10% of the revenue mix.
Gilead is seeing solid growth in certain product lines. In the second quarter. Oncology (cancer) treatments generated growth of 71%, albeit from a relatively low base reaching total revenues of $527m. Its combination treatment for HIV, Bitkarvy, is its biggest seller and grew revenues by 28% to $2.6bn. Operating profit fell by 10% to $2.0bn, predominantly driven by an increase in external R&D spending.
With size comes firepower to drive R&D. The pipeline comprises 58 clinical-stage programs, plus 11 assets over which it has the option to partner. The pipeline included two candidates pending marketing approval – Lenacapavir, a long-acting HIV treatment for heavily treatment-experienced people and Hepcludex for the treatment of Hepatitis D. Decisions on either could offer short-term catalysts. Gilead currently trades on a forward price to earnings multiple of 9.5 – below its long-term average and the wider sector. However, there are risks in the US with pressure on drug pricing, and the ever-present prospect of expensive failed development programs.”
“Regeneron’s Covid-19 treatment, REGEN-COV’s removal from emergency use in the US has prompted management to curtail this part of Regeneron’s development plans. This really hurt recently reported second-quarter revenues, which fell 44% to $2.9bn. More encouragingly, non-REGEN-COV revenues increased 20%. Within that was the flagship EYLEA, used for the treatment of multiple eye conditions, which grew by 14% to $1.6bn. Though, management will need to keep an eye on emerging competitors in this space.
In spite of lower revenues and profits free cash flow more than doubled to $2.3bn. Regeneron’s market value is at a premium to Jazz and Gilead. That said the earnings multiple is well below its ten-year average.
Regeneron’s drug discovery capabilities are complemented by its VelociSuite technology platform with a focus on the $200bn monoclonal antibody market. Regeneron’s pipeline comprises some 35 clinical programs with three marketing applications already submitted this year, and a further 18 targeted by the end of 2024. That could provide a boost to revenue, but remember, approvals certainly aren’t guaranteed.”
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