Goldman Sachs stated that amid cautious sentiment from investors towards the USA pharmaceutical sector before the Earnings Reports season, the performance of USA pharmaceutical companies that have reported results so far for the first quarter has not been worse than expected, and in some cases, it has even exceeded expectations.
According to the Zhitong Finance APP, after multiple USA pharmaceutical companies have successively announced their latest Earnings Reports, Goldman Sachs recently released a Research Report stating that amidst the cautious sentiment of investors toward the USA pharmaceutical Sector that the bank previously pointed out before the earnings season, the performance of disclosed USA pharmaceutical companies for the first quarter has not been worse than expected; in some cases, it has even exceeded expectations.
Goldman Sachs pointed out that Johnson & Johnson (JNJ.US) performed impressively in its pharmaceutical portfolio, Merck (MRK.US) and Bristol-Myers Squibb (BMY.US) announced solid performances, while AbbVie (ABBV.US) delivered an earnings report that exceeded expectations and raised its guidance in the current uneasy market atmosphere.
Goldman Sachs added that further looking ahead, based on the explanations provided by company management during the earnings call regarding key uncertainties in the Industry, the overall sentiment has slightly turned more positive compared to a few weeks ago, despite considering that the outcomes of tariffs are still unclear; the bank remains cautious against excessive optimism.
Regarding the topics and themes generally concerning the USA pharmaceutical Industry, here is a brief recap of the information conveyed by various companies.
Tariff Issues
Regarding specific tariffs in the pharmaceutical Industry, companies do not provide much information on how to quantify potential financial impacts. Merck mentioned that, to date, the company has incurred about 0.2 billion US dollars in tariff costs, primarily resulting from tariffs between the USA and China, and to a lesser extent, tariffs between China and Mexico. Gilead Sciences (GILD.US) indicated that the tariffs currently implemented (not specifically directed at the pharmaceutical industry) have been accounted for in the company's guidance, and some impacts are expected to be offset by pressures from Exchange Rates. AbbVie also stated that it has included a small portion of tariff costs in its financial guidance.
In terms of strategies to mitigate the impact of tariffs, company management has emphasized various means to absorb potential shocks this year, including inventory management/transfers, supply chain flexibility, alternative sources for Active Pharmaceutical Ingredient (API), as well as cost efficiency and productivity improvement measures. Unsurprisingly, companies also mentioned efforts to strengthen domestic manufacturing bases in the USA, with significant scale — Merck will reinvest 9 billion dollars in the USA, AbbVie plans to invest 10 billion dollars over the next decade, and Roche also pointed out that it will invest about 50 billion dollars in the USA over the next 5 years. Furthermore, before this, Novartis AG (NVS.US), Eli Lilly and Co (LLY.US) and Johnson & Johnson announced investment commitments in the USA ranging from 23 billion to 55 billion dollars. Additionally, company management widely believes that promoting the return of manufacturing and R&D to the USA through tax policy rather than tariff measures will be more effective.
Pharmaceutical Pricing
Regarding the topic of international reference pricing/Most-Favored-Nation (MFN) clause, company management generally expressed a consistent view that they hope overseas (especially in Europe) countries will pay higher prices for the innovations brought to the USA. Goldman Sachs believes this is a new theme worthy of continued attention, as management from American and European pharmaceutical companies seem to have reached a consensus on their overall stance, although the specific implementation mechanisms remain unclear.
Companies also reiterated the importance of reforming Pharmacy Benefit Managers (PBM). AbbVie stated that they are very encouraged by the "pill penalty" reforms mentioned in the recent executive orders introduced by the U.S. government regarding drug pricing.
FDA Uncertainty
A somewhat reassuring point is that regarding the regulatory uncertainties brought about by the restructuring of federal healthcare agencies, company management has generally stated that as of now, they have not seen signs of slowing communication with the U.S. Food and Drug Administration (FDA) or delays in short-term filings and critical PDUFA (Prescription Drug User Fee Act review deadline) extensions. Goldman Sachs noted that this is an issue it will continue to closely monitor with investors.
Mergers and Acquisitions.Environment/Business Development (BD)
Goldman Sachs stated that as the first quarter Earnings Reports season began, the firm initially felt that investor expectations for merger and acquisition comments would weaken due to broader market uncertainties and the need for capital to be reallocated to localized manufacturing and capital expenditures (CapEx). However, the opposite has been true so far, as comments from company management have highlighted some potential acquirers' strong interest in mergers and acquisitions.
Merck indicated that although uncertainties in the external environment have made it more complicated to advance trades, this has not prevented the company from actively pursuing them. Management pointed out that there is still a discrepancy in expectations between buyers and sellers, as sellers have not yet adjusted their valuation expectations to align with the current market environment. However, they are confident of completing the trades and mentioned that projects are in the pipeline. Additionally, Goldman Sachs noted that Merck has confirmed it is in late-stage negotiations with the biotechnology company SWTX.
Bristol-Myers Squibb reiterated that Business Development (BD) is the top priority for its capital allocation (although it has always been seen as a priority, it has been relatively quiet recently due to digestion of previous transactions, and is now prepared to be more active). Despite the official stance being consistent with before, Goldman Sachs believes that the company's emphasis on pursuing BD opportunities has increased (investors in the market also discuss whether this is related to the disappointing performance of recent catalysts in the company's growth portfolio). Overall, Goldman Sachs believes this is part of the Bullish Signals in the Biotechnology industry's merger and acquisition environment.
Goldman Sachs indicated that this week, market focus will shift to Pfizer (PFE.US) and Eli Lilly and Co's upcoming first quarter performance. Notably, Goldman Sachs specifically mentioned Merck. They pointed out that AKESO's ivonescimab is seen as a potential competitive threat to Merck's cancer drug Keytruda (K Drug). Goldman Sachs believes that Merck's stock price has already been negatively affected twice by the risks faced by Keytruda, once due to the patent cliff issue and another time due to being perceived as threatened by potential new therapies.
Goldman Sachs noted that Merck's management downplayed these concerns during the Earnings Reports conference call. The firm pointed out that among all the pharmaceutical companies they cover, the market has the most negative expectation of Merck's implied terminal growth rate (-7%, compared to the industry average of -1.9%). Goldman Sachs believes this is overly harsh; if sentiment in the pharmaceutical industry improves in the future, Merck's stock price is expected to rebound, and its implied negative growth rate could return to levels closer to those of its peers facing patent expirations.
