Large US drug manufacturers posted mixed Q4 results, with most beating the earnings expectations but disappointing on sales. Most of these companies also issued conservative 2023 guidance. The US pharma sector saw a difficult 2022, with stocks witnessing declining valuations and a slowdown of new drug approvals.
This article breaks down what hurt pharma stocks in the beginning of 2023, why the stocks are seemingly trending up in April, and what this entails.
But First, the Big Losers
Johnson & Johnson hit a 52-week low on March 22, 2023 due to multiple reasons. The foremost reason was a reduction in the production of the Covid-19 vaccine, although this was expected due to reports of reduced sales. Additionally, a disappointing sales report for Q4 2022 exerted downward pressure on the share price. Litigation fears from Emergent Biosolutions and the spinoff planned in the last quarter of 2022 dragged the prices down. Although the company surpassed sales expectation in Q1 2023, it lowered its guidance for the year, reporting a loss of $68 million on consumer staples. Given that J&J is considered the bellwether for the US pharma industry, its poor performance is bound impact the overall sector.
Pfizer Inc. is another pharmaceutical and biotechnology giant that pressured the US pharma industry. The company’s share price hit a 52-week low on April 20, having lost 20% of its valuation year to date. Although the company’s adjusted earnings grew 62% year over year in 2022, beating both Zack’s consensus and the company’s guidance, a conservative revenue guidance for 2023 hurt investor sentiment. The guidance was below expectations, declining further from the 2022 levels due to the slump in Covid-19 vaccine demand, and higher spending on late-stage pipeline candidates and new launches scheduled in the near term.
What Hit the Pharma Sector So Hard?
The rough start to the year for the US pharmaceutical stocks was largely attributed to pricing pressures. However, there’s much more to the story.
The sector had been a high earnings base for investors since the Covid-19 pandemic. Stock trading is all about balancing one’s portfolio to maintain profitability and it has been long since investors have rotated theirs. Plus, interest hikes and recessionary fears reinforced the demand for safe havens, while the growth of the energy sector attracted investors.
The prolonged US-China feud led to shortages in raw material supply. Additionally, supply chain disruptions through 2022 weighed on company performances. This hurt investors, who then drew their money out of the sector. Although the sector was initially successful in offsetting rising costs with price increases, it turned out to be a hard pill to swallow for the consumer.
Despite multiple rate hikes by the Federal Reserve, it took a long time for inflation to ease. The resultant increased costs weighed pharma stocks down, especially in the preventive care segment.
Post-Covid-19 burnout, an aging workforce and lower compensation than the effort required have created healthcare worker shortages in the country. Also, a lack of instructors is affecting the preparation of a new generation of workers, leading to a drying out of the talent pipeline across the US. The skill gap across the healthcare industry is costing the industry its performance on a large scale.
Decline in Covid-19 Revenue Streams
During 2022, Covid-19-related pharmaceutical demand dropped significantly, cutting off major revenue streams for most pharmaceutical companies. This led to lower-than-guidance performances across the sector. Additionally, companies had overstocked supply amid the endemic resurgence of coronavirus in China, which led to inventory being rendered useless due to its limited shelf life.
Poor Performance by First Launches
A study by ZS.com of 36 new launches showed that only 4 met expectations, 13 underperformed and 13 overperformed. This meant that more than 50% of the new launches underperformed analyst expectations during 2019-2021, despite most of them being based on tried and tested domains. Investors following the sector invariably responded to such lacklustre performances.
Is the Pharma Sector Regaining its Momentum?
After a rough 2022, Fitch has a neutral outlook for the global pharma and biotech sector for 2023, while PwC has projected higher M&A among US pharma companies, especially in the oncology and immunology segments. A few reasons driving the uptrend are:
- Biotech-led pharma innovations. Since this segment has been receiving massive investor funding, majorly for preventive and non-invasive curative healthcare, it could help boost pharma growth.
- Managed terminal and chronic care. This is another segment pushing the uptrend due to the aging US population.
- New FDA commissioner. The ramping up of the new commissioner may have set the tone for improvements across the sector.
- Disappointing tech earnings. Tech giants have missed earning expectations in the first quarter, which could drive investors back to the defensive pharma sector.
- Lower drug prices. The US government’s measures to reduce drug prices, as part of its budget, is also helping pharma stocks rally.
The Outlook for Pharma
The above reasons undoubtedly are a positive indication for the sector, but headwinds due to rising interest rates are bound to continue exerting pressure. Also, according to a report by McKinsey & Co, a significant shift to Medicare, endemic Covid-19 could bolster the segment in 2023-24. Accelerated research on personalized medicine, with the help of big data and artificial intelligence, also suggests investors should remain optimistic about the sector. Plus, growth in the MedTech will have a positive impact.
However, the US government’s efforts to push growth in the sector might not begin to show results until 2024. McKinsey & Co estimates that pharma profits will grow at a CAGR of 11% (faster than their previous prediction) between 2021 and 2026 to hit $75 billion by the end of the forecast period.
Whether pharma is back on track, or the stock rally is just a sign of exhaustion that the Wyckoff theory talks about will be clear as the year unfolds. Experts, however, believe that for now, trading stocks of well-known pharma names and those working in emerging fields, such as biotech, genetic therapies and MedTech, which have been performing comparatively better than others, could be a smart decision.
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