We recommend avoiding names that offer little growth or opportunity for a take-out. These include companies which are developing drugs that are likely to face regulatory hurdles. The FDA has been exercising more caution in granting approval to new products and several candidates are facing delays in receiving final approval.
We would also avoid companies like Eli Lilly (NYSE: LLY), which are facing patent expirations on key products and whose new products may not be enough to make up for the loss of revenues that will take place once generics enter the market. 2012 will be a challenging year for Eli Lilly, with the company losing patent exclusivity on Zyprexa in October 2011. Zyprexa sales should erode rapidly with the entry of generics. Moreover, we expect continued erosion of Gemzar sales due to genericization. Another company that is highly exposed to a patent cliff is Forest Labs (NYSE: FRX).
Another company facing generic competition is ViroPharma (Nasdaq: VPHM). Estimates are down significantly as the company's lead product, Vancocin, began facing generic competition recently. The entry of generic versions will lead to a rapid decline in branded Vancocin sales. We expect ViroPharma to remain under pressure as generic players launch their versions of the drug.
We currently have a Zacks #4 Rank on Novartis (NYSE: NVS). We expect 2012 to be a challenging year for the company given manufacturing issues, pricing headwinds, generic competition and unfavorable currency movement. The company's first quarter 2012 results were below expectations.
United Therapeutics (Nasdaq: UTHR) also carries a Zacks #4 Rank. We are not too bullish on the company's chances of gaining US approval for oral treprostinil, given the mixed data on the candidate. Moreover, the company's weak late-stage pipeline concerns us.
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