The Week Ahead In Healthcare

By Stephen D. Simpson, CFA | August 13, 2012 AAA

Healthcare has settled back into its normal late summer routine, with relatively little in the way of new product introductions or other market-moving data. That's not to say that the space is entirely quiet, though, as business continues to go on.

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Novo Continues to Drive One of the Greatest Growth Stories in Healthcare
Very few healthcare stocks are as expensive as Novo Nordisk (NYSE:NVO), but few companies deserve that sort of premium either. There aren't too many companies with multiple billions of dollars in revenue that are growing more than 20%, but Novo is managing to do so largely on the strength of its diabetes franchise. Novo Nordisk stands tall alongside Lilly (NYSE:LLY) and Sanofi (NYSE:SNY) in the insulin space, while its Victoza remains a leading pharmaceutical option for Type 2 diabetes.

While the FDA approval timeline for a new insulin product has slipped a bit, and the company does face a potentially rejuvenated competitor now that Bristol-Myers (NYSE:BMY) and AstraZeneca (NYSE:AZN) have completed the deal for Amylin and its long-acting Bydureon (a direct competitor to Victoza).

Another Alzheimer's Drug Fails
Last week, Johnson & Johnson (NYSE:JNJ) and Pfizer (NYSE:PFE) announced that they were more or less pulling the plug on their drug bapineuzumab for Alzheimer's. Not only did the companies announce a second Phase 3 trial failure, but also the companies are no longer intending to develop IV bapi any further. While an earlier stage Phase 2 subcutaneous trial continues, there is no particular reason to believe that this drug has any prospects in the treatment of mild-to-moderate Alzheimer's.

This news also increases the pressure on Lilly with its own Alzheimer's drug solanezumab. Prior to Phase 3 data from J&J and Pfizer, most analysts had assigned a higher probability of success to bapineuzumab than solanezumab, but the latter drug is a larger component of Lilly's potential pipeline revenue. In other words, Lilly's odds are worse but its needs are greater.

SEE: Investing In The Healthcare Sector

New Developments
Investors saw the week of August 13th start off with news that Sun Pharmaceutical and Taro Pharmaceutical (NYSE:TARO) managed to find common ground on a deal. Sun already owned two-thirds of Taro, but the company had rejected a prior offer of $24.50. With the offer hiked 60% to nearly $40 a share, though, Taro found a deal it could accept and will become wholly owned by Sun.

Pfizer is moving ahead with its asset monetization plans, announcing the filing of registration documents for the IPO of Zoetis - its animal health business. While the IPO is only scheduled to raise about $100 million, it should allow Pfizer to pursue a gradual divestment strategy for a business with more than $4 billion in revenue. It's also worth noting that while animal health is a sizable market, most animal health businesses are locked up inside larger companies and Zoetis will be a rare pure play for investors.

SEE: What Is a Pure Play?

The Bottom Line
The performance of healthcare stocks (as measured by ETFs) has begun to falter a bit. The Health Care Select Sector SPDR (ARCA:XLV) is up 11.8% year-to-date, slipping below the the 12.2% return of the S&P 500. The iShares Dow Jones U.S. Pharmaceuticals ETF (ARCA:IHE) is up 14%, while the iShares Dow Jones U.S. Medical Devices ETF (ARCA:IHI) is up 10.7%. The SPDR Biotech ETF (ARCA:XBI) has risen almost 28% year-to-date.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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