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Biotechs led robust Q2 earnings; generic drug makers fall behind


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Biotechs led robust Q2 earnings; generic drug makers fall behind

Most major biopharmaceutical companies beat second-quarter earnings per share and revenue estimates, several by significantly high but potentially one-time margins.

Biotechs, in particular, had a strong quarter, Leerink analyst Geoffrey Porges said in an Aug. 3 note. Among the large-cap biotechs covered by Leerink, companies averaged a 9.8% beat on consensus earnings and surpassed revenue expectations by a median of 5% to 5.7%.

Pharmaceutical companies had a tepid quarter by comparison, according to Porges. Though many still surpassed expectations, Eli Lilly and Co. and Merck & Co. Inc. delivered the only significant revenue surprises, he said. Major pharma covered by Leerink averaged a 4.8% beat on consensus earnings numbers.

Broadly, first-quarter payer hesitancy to cover new drugs seems to have waned in this quarter while demand grew, Porges said.

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Earnings driven by pricey drugs

Yet several of the major earnings spikes were driven by potentially one-time revenue boosts. Many raised EPS guidance by less than 1% for the rest of the year or did not raise it all, Porges said.

Takeda Pharmaceutical Co. Ltd. soared past expectations with a 42.37% beat on EPS estimates, propelled largely by significant sales jumps for three high-margin medicines. Nevertheless, the Japanese drugmaker maintained its initial guidance for the rest of the year, including a forecast of low- to mid-teen underlying core EPS growth.

Nearly all of the company's one-time income earners for the year happened in this quarter, including the sale of a subsidiary, Wako Pure Chemical, and an office building, said CFO, corporate officer and director James Kehoe on the earnings call. The majority of Takeda's one-time expenses for the year are also coming up in the next nine months, he added.

Meanwhile, Gilead Sciences Inc. and Biogen Inc. both had higher-than-expected prescriptions levels for key products, although analysts cautioned that these numbers could decline in subsequent quarters.

Gilead, in particular, will have to shift the balance to newer drugs in its HIV franchise, despite exceeding expectations for hepatitis C sales this quarter due to a marketing push that brought in a wave of baby boomers. The company increased revenue guidance by $1 billion for the rest of the year and brought its EPS guidance range up by two cents.

The raised expectations had Evercore ISI analyst Umer Raffat nervous, he said, writing in a July 26 note that he fears it will set a high bar for Gilead, particularly with the looming arrival of a lower-cost competitor from AbbVie Inc. and continued decline in patient volume combined with potential price pressure.

Biogen, on the other hand, saw strong sales out of the gate for its new spinal muscular atrophy drug, Spinraza. Yet the drug's roughly $500,000 initial cost is halved for subsequent treatments, meaning revenue could fall as more patients with the rare disease get treated and move to maintenance therapy, Raffat said.

Biogen raised full-year revenue guidance by $400 million, which some analysts deemed conservative. Barclays' Geoff Meacham said in a July 25 note that while new patient starts for more severe forms of the disease may slow down the rest of this year, Spinraza's recent European approval and the company's focus on getting it to type 1, or less severe patients, should propel profit. Meacham rated the stock overweight and raised revenue guidance by $500 million.

Other EPS beats came from Regeneron Pharmaceuticals Inc., which reported strong sales for its flagship product and a solid new drug launch, and AstraZeneca PLC, whose share price has since fallen sharply following a significant drug trial's failure.

Incyte Corp. fell 2 cents under EPS consensus estimates, which translated to a 50% miss on expectations that already assumed a slight loss. The company's research and development expenses have ramped up significantly in sequential quarters; it is developing a cancer immunotherapy combination drug that has garnered excitement on positive phase 3 trials.

Generics missing the mark

While many brand medicines met or exceeded sales expectations, generic drugs saw significant U.S. challenges this quarter, with knock-on effects for Teva Pharmaceutical Industries Ltd., Mylan NV and Novartis AG's Sandoz unit.

Teva and Novartis both cited price erosion as a critical factor in their drop, while Mylan, the last of the big generics makers to report, highlighted approval slowdowns in the U.S. Food and Drug Administration and said it would push back the rest of this year's launches.

Teva and Mylan slashed expectations for the rest of the year; Novartis, confident in its brand drug franchises and generic launches down the line, maintained its full-year guidance. Management from all three companies warned that pressures on the U.S. generics market were likely to stick around for some time.