With the rapid strides made in the last decade, the pharmaceutical industry seems to be poised for a revolution. The most important milestone reached was the mapping of the complete human genome initiated by Craig Ventor, an American biologist and entrepreneur.The human genome includes all the information that is encoded in DNA, thus serving as a guidebook containing detailed information in the biological makeup of any individual. These discoveries could potentially change the way we perceive medicine and health care in general.
In the near future, newborn babies susceptible to certain genetic disorders due to inheritance from their parents may be preemptively diagnosed and treated before they manifest in later age. Furthermore, personalized medicine could take off in a big way thanks to the Human Genome project.
Big Pharma has grappled with the problem of variance in efficacy of medicine and vaccines, due to the simple reason that different individuals respond differently to various drug therapies. A lot of individuals have to either go through the tedious process of changing prescriptions or see their ailments worsen.
- Warning! GuruFocus has detected 3 Warning Signs with NYSE:TARO. Click here to check it out.
- NYSE:TARO 15-Year Financial Data
- The intrinsic value of NYSE:TARO
- Peter Lynch Chart of NYSE:TARO
Personalized medicine is a game changer in this regard since it is exactly tailored to the different genetic orientations of distinct individuals. If individuals cannot respond well to a certain batch of drugs, they are prescribed medicine and medical treatment that their bodies are most likely to favorably respond to.
There have been a slew of personalized drugs that have proven to be effective in treating cancer. Gleevac was a drug introduced by Novartis in 2001 to treat chronic myeloid leukemia, which has been known to increase patient mortality. Pfizer followed suit by introducing crizotinib for lung cancer patients while a whole cornucopia of personalized treatments are in the development phase.
In the future, many optimists point out, the genome of children will be sequenced before they are born. Diagnoses that requires expensive equipment could be undertaken with far more cost effective and convenient methods than is being employed today. Information technology is set to play an increasingly central role in health care delivery, especially as health apps and sensors start to work in tandem with today’s smart phones for logging the user's vitals and health symptoms. It's a standard feature in today's smart phones to check the pulse.
Owlstone, a subsidiary company of Cambridge University, claims to bring an add-on device for smartphones in the market that could diagnose cancer and other ailments by a simple breath analysis, in two years.
As technology improves, technology experts predict that it will play a much wider role in healthcare in the coming years. Furthermore, many devices could alert of impeding medical emergencies beforehand and induce the user to take corrective action or visit their local health practitioner.
Furthermore, there has been a seismic shift in demographics and their consequent health needs in recent decades. The developed world has an ageing population while the developing world buoys with rise in income. The quality of health care has driven up the demand for drug therapies. Alarmingly the cost of new drugs has also risen, posing a problem for widespread health care delivery.
A record $1 trillion will be spent globally on medicines in 2014, according to IMS Health, a research firm. The health industry in the coming years willhave to cater to demand, introduce novel health treatments, all the while keeping drug treatments economically feasible to make them widely available. The potential benefits of operating in developing markets especially India and China, which account for one-fifth of the total global population could be immense. No wonder pharmaceutical companies big and small are in a scramble to gain a foothold there.
Nevertheless, they have faced stiff competition from home grown champions, case in point Cipla and Ranbaxy, makers for low priced variants of drugs in India have not only achieved success in their home market but have ventured out in developed and developing countries owing to consumer preference for economically priced medicine. The rise of pharmaceutical firms in developing countries is an interesting development in a field that has been historically dominated by companies based in the West.
Many cite the expensive and time-consuming process of developing new medical treatments as the primary cause of the high prices that many consumers have to contend with. Corporations invest a portion of their profits in their research and development departments, without which new drug discovery would be practically impossible. That leaves many pharmaceutical companies trying to achieve a balance between affordable health care and return on investment in a double bind.
Snapshot of the Industry:
Amidst all these momentous changes in the industry, firms are still forging ahead introducing new medication, undergoing mergers and acquisitions and trying to improve both their health and shareholder equity at the same time. Over the last few years firms like TARO, Perrigo, Merck and Rafarma pharmaceuticals in particular have made notable strides in the industry. Even though their share value has fluctuated, they nevertheless have maintained a positive trend and are prized assets for investors.
Taro Industries (NYSE: TARO) has been operating below the radar but still solidifying its core businesses and moving into new product categories.Taro's core business includes the development and sale of prescription medicine and over the counter drugs in the U.S., Canada and Israel.It specializes in pediatric creams and ointments, liquids, capsules and tablets to treat cardiac disorders, mental ailments and dermatological infections and inflammations.
The company's shares have made a steady recovery after dipping in 2013, when Sun Pharmaceuticals and Taro mutually announced to terminate their merger agreement. A glance at TARO’s financials points to merrier times ahead. With a substantial cash reserve of $640 million dollars at the end of June 2013 leaves a lot of discretionary spending for the company to invest in areas of research and development and business development activities. At the end of 2013, the company reported an increase of net sales - $572.1 million, an increase of $66.3 million over the corresponding period A market capitalization of $4.95 billion, P/E ratio of 15.94 and EPS of 7.16, making it a secure investment for even the most prudent of stock traders. The shares currently trade at $114.45.
By some estimates, Perrigo (NYSE: PRGO) is the largest manufacturer of private label over-the-counter pharmaceuticals in the U.S. The company has a very well developed distribution network through which it sells its smoking cessation products, analgesics, feminine hygiene products, cough and cold remedies, laxatives, vitamins, nutritional supplements, nutritional drinks and antacids.
In 2008, the company announced a record net profit of $1.8 billion, a 27% increase over 2007. The accelerating trend has sustained over the years as the company reported $223 million in net income in 2010, which further increased to $ 339 million in June 2011. The increase in company fortunes resumed in 2012 with a reported net income of $401 million and an astounding net profit of $441 million in 2013.
Perrigo’s recent performance in 2014 has however been a tad disappointing after it failed to meet the sales outlook. It was recently downgraded from the "top pick category of shares to outperform." The main causes attributed to a drastic decrease of 57% of profits have been the acquisition expenses and amortization charges incurred by the company.
In response, the company president and CEO Joseph Papa stated, "Despite the challenges of this quarter, we remain upbeat as the megatrends in our durable business model remain unchanged, highlighted by the increasing number of products switching from prescription to OTC status." This statement was meant to reassure company stakeholders of the long term vitality of the company.
Merck (NYSE: MRK) is one of the titans of the pharmaceutical industry. Founded in 1668, it has been an integral part of modern medicine ever since. Merck has traditionally employed a prestigious place in the pharmaceutical industry, having truly global presence. The company’s markets span from North America, Asia, Africa, Europe and Oceania, making it a pharmacist of choice for a globalizing world. The company had a recent cash infusion of $14.2 billion when Bayer agreed to buy Merck's consumer unit in May 2014. Following the agreement, both of the companies will be jointly collaborating in the future in developing a host of OTC (over the counter) drugs.
A look into Merck's financials does reflect dismal revenues in the last quarter's filings. Revenues have fallen drastically from $47.3 billion in 2012 to $44 billion in 2012. Reduction in revenue coupled with an increase in operational expenses of the company has reduced net profit from $6.2 billion in 2012 to $4.4 billion in 2013. The loss was attributed patent expirations and unfavorable impact of foreign exchange. Many experts speculate that for the current fiscal year of 2014, the company’s revenue will fall between $42 to $43 billion.
All this frantic activity in the big pharmaceutical firms does not mean that smaller firms in the sector have been in a lull. Rafarma Pharmaceuticals (OTN: RAFA) represents a bold and innovative company that is not afraid to punch above its weight. Rafarma Pharmaceuticals exclusively focuses on the Russian Federation where over the years it has built a robust distribution network.
Its core business involves the manufacture and sale of generic drugs, antibiotics and specialty drugs to treat common ailments, various types of cancers, accidental wounds, inflammatory eye diseases, and immunological disorders. The company is based in Utah with its distribution facilities scattered on the Russian mainland.
The company has a current market cap of $ 19.4 million with 1.6 million shares in flotation. The total asset base is $460 million which adequately secures the current market value of the firm which stands a $19.4 million. Rafarma has reported massive increases in its investments in its last two annual filings. In November 2012, the company reported total investments worth $330 million, an exponential increase from $2 million from the last fiscal year. It further increased investments to $460 million in February 2014. Aggressive investing activity does signify the firm’s growth aspirations and increasing confidence in its growth prospects.
Recently the company has been able to secure a three-year deferment of its loan of 90 million euros underwritten from VNeshconombank (VEBank) which will boost short-term profitability of the company. An additional credit line of 25 million euros has also been extended to the firm that willallow it to invest in its operations and ensure efficiency and speedy delivery of its various product lines. The company’s 270,000-strong manufacturing facility is slated to be in full operational capacity this year, which would expectedly ramp up production of Rafarma’s products.
Rafarama Pharmaceuticals has also completed an agreement with Amber Pharma Distribution Group, which would allow it to expand into high-quality pharmaceutical products. Furthermore the company's CEO Dave Anderson has outlined the firm’s plan to introduce its proprietary FZED line of products which are in the clinical testing phase and will be available by 2015. Furthermore, he is bullish on Rafarma’s financial prospects for the current fiscal year of 2014, claiming that the firm’s revenues will exceed $100 million.
The Road Ahead
The higher frequency of mergers and acquisitions in the pharmaceutical industry is underscored by various developments that have been unraveling in the last few years. As the number of drugs coming into the market declines and patents for propriety drugs start lapsing, many companies are looking to expand in new markets and product categories to sustain growth.
In keeping up with the immense potential of technology and recent medical discoveries, many firms are also investing a significant portion of their earnings in research and development to develop products that would favorably impact the company bottom line in the long term.
The pharmaceutical industry along with the field of medicine is on a cusp of a new age. Many compare the industry to the nascent personal computer industry in the mid 1980s after which it experienced a renaissance leading to a computing revolution. Medical breakthroughs in the field have the potential to radically improve healthcare and quality of life for millions of people. The efficacy of anti-retroviral drugs in prolonging the life spans of HIV sufferers is an excellent example of how the pharmaceutical industry can alleviate human suffering.
The recent consolidation in the industry may signal the desire of many companies to shore up their risk and seek diversification but as the success of HIV medication has shown, for sustained growth in the coming decades they will have to harness the power of technology and science to introduce innovative products that improve public health.
This makes good financial sense too, since many of the patents of proprietary drugs are set to expire in the coming years. Many firms would be compelled to invest in new technologies that lead them to not only become market leaders but leaders in innovation as well.The firms would also be well advised to tap into the research being undertaken in academia and government funded institutes instead of relying solely on their own research and development departments.
Which among these companies is primed to be the "Google of the Pharmaceutical Industry?" Only time will tell.