3 Stocks Benefiting From Jaw-Dropping Growth in Specialty Drug Spending

Express Scripts‘ (NASDAQ: ESRX  ) data crunchers have released their report on drug-spending trends over the past year, and the results are nothing if not jaw-dropping.

According to the pharmacy benefit manager, Americans spent 30.9% more on specialty drug prescription medicine in 2014 than they did a year ago. Among the drug developers benefiting most from this surge in specialty drug spending are Gilead Sciences Inc.(NASDAQ: GILD  ) , Celgene Corp (NASDAQ: CELG  ) , and AbbVie (NYSE: ABBV  ) , so let’s take a closer look.

No. 1: Gilead Sciences
No company has been a bigger beneficiary of specialty drug spending growth than Gilead Sciences. The company rolled out two revolutionary hepatitis C drugs last year, and each of them was priced at sky-high levels.

As a result, Express Scripts reports that spending on hepatitis C drugs soared by 742.6% last year. That rapid acceleration stems from both a significant unmet need for more effective, shorter-duration therapies, and price tags for Gilead Sciences’ Sovaldi and Harvoni that clocked in at north of $1,000 per pill.

Although Gilead Sciences recently reported that it’s offering steep discounts to these drugs this year to maintain market share, the company still expects to generate billions of dollars in sales from Sovaldi and Harvoni in 2015.

Last year, those two drugs generated a combined $12.4 billion in revenue for the company, leading to more than a doubling in Gilead Sciences’ sales — and that’s with Harvoni only coming into the market in October. This year, the impact of these two drugs will be more muted, but it will still be positive.

Gilead Sciences expects revenue will grow by between 4.4% and 8.4% to between $26 billion and $27 billion in 2015. Given that there are more 3 million Americans and 9 million Europeans with hepatitis C, and the fact that Sovaldi and Harvoni treated just a fraction of them last year, it appears that rising specialty drug spending will remain an important tailwind for the company for the foreseeable future.

No. 2: Celgene Corporation
Celgene Corp is best known for its market dominance as a developer of the leading multiple myeloma drugs Revlimid and Pomalyst, but its 2013 FDA approval of Abraxane for pancreatic cancer also means it’s a big beneficiary of rising spending on cancer therapies.

According to Express Scripts, spending on specialty drugs used to treat cancer jumped by 20.7% last year. That increase is mostly due to a larger, older population of patients being diagnosed with the disease, as well as the introduction of next-generation cancer therapies like Abraxane.

Despite concerns over its cost and its arguably limited ability to extend patient’s lives, doctors are increasingly prescribing Abraxane. Last year, Abraxane’s sales grew by 31% to $848 million thanks to growing script volume.

Since pancreatic cancer remains one of the globe’s toughest-to-treat diseases, and cancer prevalence is likely to grow as baby boomers age, it’s unlikely that demand for Abraxane will wane. For that reason, Celgene expects Abraxane’s sales will eclipse $1 billion this year.

No. 3: AbbVie
Gilead Sciences’ specialty drug success has been tied to new drug launches, and Celgene’s has come thanks to an approval for a new indication, but AbbVie’s specialty drug growth is due to Humira’s long-standing dominance as a treatment for autoimmune disease.

Humira, which is used to treat conditions including arthritis and psoriasis, is the planet’s top-selling medicine. In 2014, Humira raked in more than $12.5 billion in sales, up 17.7% from the year before. That’s remarkable growth, especially for a drug with sales that are already so high, and one that’s been on the market since 2002. However, that growth is unlikely to continue.

That’s because Humira is slated to lose patent protection at the end of 2016, clearing the way for biosimilar drugmakers to launch competitors. While the upcoming competition means specialty drug spending trends for autoimmune drugs may not fuel AbbVie’s growth for too many more years, AbbVie did recently acquire Pharmacyclics to get its hands on Imbruvica, a fast-growing blood cancer drug with sales of roughly $500 million last year — its first year on the market. In January, Pharmacyclics estimated that Imbruvica could deliver sales of more than $1 billion this year. If so, AbbVie’s acquisition means it will still benefit from increasing specialty drug spending trends.

Tying it together
Specialty drugs are complex to manufacture, so their pricing has historically been much higher than prior-generation small-molecule drugs. That’s unlikely to change; however, pressure remains from payers for drugmakers like these to rein in soaring drug costs. Whether or not that means these companies will be forced to take increasingly bigger haircuts on their drug prices isn’t certain, but given that each of these companies has a long track record of successfully navigating regulatory and market challenges, it’s likely all three will continue to benefit from increased specialty drug spending in the future.

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