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Who’s winning in the battle for efficient capital deployment?

Over the last ten years, large pharma companies have spent an average of $120bn across R&D and business development investments. The net result? Portfolios worth approximately $210bn, according to Evaluate’s net present value (NPV) methodology. However, within these averages lie dramatically diverging performances, highlighting the challenges of deploying capital efficiently. Overall company performance is heavily influenced by individual megabrands, while M&A is not a guarantee of success.

Not all pharmas are alike

The chart below shows the varying performance of the largest 15 biopharmaceutical companies according to spend and value creation. Spend is measured as an estimate of pharma-specific R&D over 10 years, added to upfront licensing fees and M&A transactions with biopharma partners. NPV is a proprietary calculation, derived from Evaluate’s consensus forecasts set against the costs required to achieve such revenues. Each company’s assets – marketed and pipeline – carry a NPV, which can be combined to provide an estimate of total portfolio value.

As a collective, companies have shown value creation, yielding portfolios that are worth more than a realistic estimate of the R&D and business development investments to achieve them. However, there is a seven-fold spread between the best and worst performing companies on this metric. At the bottom end of the range are companies investing more than $100bn each and facing revenue challenges and uncertain growth profiles. It is a huge challenge to deploy capital and reinvest into portfolios and pipelines efficiently.

Home-grown vs external innovation

There are commonalities between similar companies and where they appear on the chart. It is no surprise that the overperformers have been companies at the cutting edge of industry growth drivers. By and large, their position is cemented by the incredibly high valuations of individual drugs. A single therapy can be worth upwards of $100bn, which is larger than the market caps of entire companies in this cohort. These drugs have been the result of investment on internal R&D, creating value through impressive clinical data and market adoption.

On the flipside, pharma companies that have been the most active in M&A tend towards underperformance. Large acquisitions are unlikely to unlock the kind of value that will drive overperformance against peers. This is especially true in the case of mega-mergers, when mature companies are fairly valued and share price premiums will likely erode part of the upside. M&A may not be the direct cause of underperformance, but rather it may become a strategic necessity in order to address near-term revenue challenges.

Allocating investment between home-grown R&D and external innovation is a careful balancing act. Pharma R&D investments are inherently riskier with a longer time frame required to realise value, although the upside may be greater. Conversely, a tremendous amount of innovation is originated by small to mid-size biotechs and must be harnessed, even if the process may become competitive with peers. With finite budgets, choosing the appropriate capital allocation strategy becomes a huge differentiator. There are some essential lessons to learn from past case studies, while access to the best market data can guide the optimum strategy for tomorrow.

This analysis was taken from a deeper analysis of R&D spend and value creation, first published in Scrip. To download the full article, please follow the link here.


Daniel Chancellor

VP Thought Leadership, Norstella


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