ImmuPharma, Shire, ReNeuron and Epistem make it into Merchant's top 12 for 2012

This year is predicted to be one of mixed fortunes for the life sciences sector, according to Merchant Securities.

Many of the larger pharmaceuticals companies such as Pfizer (NYSE:PFE), Novartis (ETR:NOT) and AstraZeneca (LON:AZN) are now facing what is known as the patent cliff.

This is where blockbuster drugs lose their patent protection and come under heavy competition.

Despite the best efforts of these groups to fill the gap, revenues and earnings will be hit as they lose exclusivity over treatments worth tens of billions of dollars a year.

There are, however, a handful that anticipated the loss of patent protection on top sellers, or hit the patent cliff early, that are expected to prosper in 2012, according to Merchant.

Shire (LON:SHP) falls into the former category, while GlaxoSmithKline (LON:GSK) is a prime example of a company that has dropped off the patent cliff, survived and recovered.

But the real winners are likely to be the smaller, innovative companies which will act as “feeders” filling the drugs pipelines of larger rivals, Merchant reckons.

“The pharmaceutical industry is in desperate need of new and innovative products, given the large number of disease areas where the conditions are either poorly treated or unmet,” Malik said in a note to clients.

Licensing deals where a drugs developer teams up with a cash-rich sugar daddy should become more prevalent, as will merger and acquisition activity.

“This year it is our expectation that deal flow will increase not only in number but also in value,” the Merchant Securities analyst said.

“This will benefit directly the smaller company market, which has experienced significant downward pressure over recent years due to a depressed funding environment and poor market valuations.”

Malik’s comments were part of a wider note from Merchant outlining its 12 picks for 2012.

He singles out four from the life sciences sector – Shire, ReNeuron (LON:RENE), Epistem (LON:EPH) and ImmuPharma (LON:IMM) – for inclusion in the list.

With a target price of 2,364 pence, Merchant expects Shire to build on the success of 2011, which saw the stock rise almost 40 per cent.

It used to specialise in attention deficit hyperactivity drugs, but today has a far more diverse portfolio that targets rare disorders and regenerative medicine.

“It is one of the few specialty pharmaceutical companies which has a footprint in all of the key growth areas,” said Malik.

ReNeuron is in the cutting edge area of stem cell research and its first clinical trial, the PISCES study being carried out in Scotland, is using them to treat stroke patients.

“We view the progress being made in the PISCES trial as being positive and are encouraged by the results we have seen to date,” Malik said.

“We believe that ReNeuron is in a leading position within the stroke field and that over time the data generated from this trial is likely to lead to a substantial out-licensing  deal for the company.”

He rates the stock a ‘strong buy’ and values ReNeuron at 33 pence a share (current price 4.95 pence).

Epistem, as the name suggests, is also in the area of stem cell research – in this case for the treatment of cancer and gastro-intestinal diseases.

Where it differs is it is cash-generative and profitable, thanks to its contract research arm.

“Finding a diagnostic company that is small, profitable and well-funded, but with huge upside, is rare, so we believe investors should look at Epistem,” Malik said.

ImmuPharma had what can only be termed an eventful 2011. It was able to claw back the rights to Lupuzor, its lead product, after partner Cephalon was taken over.

The drug targets the poorly treated auto-immune disease Lupus and has the potential to be a blockbuster.

Lupuzor is ready to go into phase III clinical trials, and will be given a fast pass through the regulatory approval process if, as seems likely, it clears this last crucial hurdle.

The only thing missing is a partner to take the treatment through to market.

“We expect Immupharma not only to re-licence Lupuzor sooner than the market anticipates (and this time with a big pharma company) but also that the up-front payment will be of a quantum that results in its enterprise value falling near to, or even below, zero,” Malik said.

*Also on the 12 for 2012 list are handbag maker Mulberry Group(LON:MUL) and the media firm Character Group (LON:CCT). Rockhopper Exploration (LON:RKH) and Lochard Energy (LON:LHD) from the oil and gas sector also rate a mention as do Amur Minerals (LON:AMC), Scapa (LON:SCPA), Globo (LON:GBO) and Xaar (LON:XAR).