Click Deloitte’s annual Christmas present to Big Pharma, a study on returns on R&D within the pharma industry link shows the return for the Core 12 companies slipping to 3.2% compared with 10.1% in 2010. With the R&D cost per successful drug rising to almost $2bn and peak sales projected at just $465m this makes unhappy reading, relieved only by optimistic talk of innovative therapies like CAR-T and new technologies like artificial intelligence. These sorts of numbers beg the question as to how Big Pharma can continue to function and what they should do differently when compared with their more successful Biotech cousins. But Big Pharma are by no means out of the game.
The chart below shows that Big Pharma still dominate the investment landscape from the perspective of market value. Big Pharma’s aggregate market capitalisation is 1.6 x that of biotechs and this includes Abbvie and NovoNordisk in the Biotech camp.
However, the ratio of Big Pharma sales to Biotech company sales is 3:1, suggesting that Biotech company sales are way more highly valued than Big Pharma sales. This is partly a function of the relative youth of Biotech products, having a much higher NPV than products closer to the end of their life cycle. But there is also a sense that biotech companies have found a solution to the R&D productivity conundrum and that this warrants an additional premium valuation.
This assumption deserves critical appraisal and a longer-term reflection on the evolution of this industry. Those with long memories will remember that small companies with a successful product have a habit of becoming large companies but rarely do they continue to grow organically. Marion Labs was the darling of investors in the 1980s as the beneficiary of calcium channel blocker, Cardizem but was acquired by Merrell Dow when growth flagged; in the 1990s Upjohn hooked its audience with Xanax and other benzodiazepines but merged with Pharmacia when its halcyon days were over; Squibb lit up hugely with the first ACE-inhibitor, captopril , but succumbed to Bristol Myers when portfolio growth dampened; Astra grew like a train with Losec in the 1990s but ran out of steam and merged with Zeneca; there are many other examples but the common theme is that they all found it difficult to come up with an encore, leaving investors to push for an exit via M&A.
Is the experience of Gilead wildly different? Small biotechs focus on a technology or a neglected product to the exclusion of everything else. Their success is usually guided by experienced executives from Big Pharma, thus utilizing hundreds of years’ worth of tacit knowledge. Furthermore, they have no legacy portfolio baggage to hold back the growth rate and so new drugs drive huge gains in market value. If they succeed (and many small companies fail!) they are hailed as representing the way forward. But Big Pharma cannot behave like a series of small companies. It attracts a different type of employee, embeds into its modus operandi a more risk-averse culture and cannot bet the farm on a plethora of new technologies; it can take some risk but it must be balanced by more bankable projects.
What Big Pharma has is a strong cash flow, good business development and commercialization skills. What it lacks in-house it can usually in-license or buy. This is not to say that Big Pharma cannot make improvements or should stop trying but we must take a step back and recognise that Big Pharma and Small Biotech are different. When commercial success drives a biotech company into the ranks of Big Pharma (eg Gilead, Celgene, perhaps Shire) its growth rate slows and its behaviour changes. ‘Twas ever thus. Big Pharma executives may have some sleepless nights about past industry misdemeanours but they should not stress too much about Christmas Past, rather they should contemplate the Ghost of Christmas Future.
The author began his pharmaceutical career at Lilly in 1981 but subsequently was a Pharmaceutical Analyst at Lehman Brothers for 23 years as well as being involved with the PharmaFutures projects www.pharmafutures.org. He is now writing independently. Stewart Adkins is a Director of Pharmaforensic Limited www.pharmaforensic.co.uk
Stewart Adkins was a Pharmaceutical Analyst at Lehman Brothers for 23 years and was involved with the Pharmafutures projects.