Drug company pipelines begin to flow again

By Ben Hirschler - Analysis

LONDON (Reuters) - The pharmaceutical industry is starting to heal.

After a barren few years, a recent batch of product approvals and some surprisingly good clinical trial news has revived hopes the sector can return to growth after its well-flagged "cliff" of patent expiries.

"There have certainly been a number of successes," said Andy Smith, a healthcare fund manager with Axa Framlington in London. "Is it going to replenish losses from the enormous patent cliff? Not yet, but it is a good sign on the way."

Over the next four years the industry will face the biggest losses to generics in its history, leaving many companies struggling to replace both sales and profits.

Until now, investors have attributed little value to new drugs in the pipeline because of doubts if they will get past increasingly safety-conscious regulators.

But things may be improving. In the second quarter of 2009, the U.S. Food and Drug Administration (FDA) approved 13 new molecules, twice the average of six in previous four quarters.

Morgan Stanley analysts believe a U.S. Supreme Court ruling in March that drugmakers can be held liable for harm from medicines despite an FDA approval has made the agency less risk-averse.

The roster of new drugs licensed for sale since March includes some big surprises, such as Vanda Pharmaceuticals's (VNDA.O) schizophrenia drug Fanapt, as well as previously delayed heart drugs Effient from Eli Lilly (LLY.N) and Daiichi Sankyo (4568.T), and Sanofi-Aventis's (SASY.PA) Multaq.

The new diabetes pill Onglyza is another recent winner, from AstraZeneca (AZN.L) and Bristol-Myers Squibb (BMY.N).

HOT BIOTECH

Biotech drugs, meanwhile, have delivered some stunningly positive clinical trial results -- notably Human Genome Sciences's (HGSI.O) Benlysta for lupus, Amgen's (AMGN.O) bone drug denosumab and Dendreon's (DNDN.O) cancer vaccine Provenge.

GlaxoSmithKline (GSK.L) is a partner for both Benlysta and denomsumab. Dendreon is currently scouting for a collaborator.

Thomas Kaufmann, a buy-side analyst at Credit Suisse Private Banking in Zurich, said recent news could prompt a rethink about the sector as investors look again at beaten-down stock prices.

"It could be a turning point for the industry in terms of stock valuations, which are at historically depressed levels for pharmaceutical companies because investors assume nothing or hardly anything will be coming out of the pipeline," he said.

European drug stocks currently trade at a price-to-earnings discount of more than 10 percent to the wider market, against a typical premium over the past decade of around 40 percent.