Untempered expectations buoy Bristol and Lilly as valuation gaps open

Analysis

With the pharma bull market in full swing and apparently defying development setbacks, it is worth taking a step back and asking just what some companies have to do to live up to untempered market expectations at a time when their businesses are coming under increasing pressure from patent expiries.

In big pharma, Bristol-Myers Squibb and Lilly stand out as companies whose share prices trade at elevated multiples of earnings that are forecast to drop sharply this year (see table below). Far be it from EP Vantage to suggest that such a simple metric can identify stock bubbles waiting to burst, or that the market has failed to adjust to new realities. But a simple peer comparison does show how dependent the two companies in particular are on R&D successes that, in some cases, might be hard to justify.

Industry leading

Shares of Bristol and Lilly are up 17% and 18%, respectively over the past 12 months, and in the case of the former this includes the effect of a 9% dip following the recent blowup of BMS-986094 in hepatitis C (Gilead benefits from Bristol-Myers’ stumble in hep C chase, August 2, 2012). Meanwhile, their earnings are set to take a big hit this year as the patent expiries of their respective biggest drugs, Plavix and Zyprexa – sales of $7.1bn and $4.6bn last year, respectively - are digested.

However, as shown below in EvaluatePharma’s ranking of big pharma companies, as the EPS denominator takes a hit in 2012 the share price multiple rises. This puts Bristol stock at an industry-leading 16.3x forecast EPS while taking Lilly from a pedestrian 9.7x trailing EPS to a more respectable 13.1 multiple of the current year’s earnings.

Big pharma price to normalised EPS multiples
2011 2012e 2013e 2014e
Bristol-Myers Squibb 13.9x 16.3x 16.4x 14.9x
Johnson & Johnson 13.5x 13.2x 12.3x 11.3x
Lilly 9.7x 13.1x 11.2x 16.0x
Abbott Laboratories 14.0x 13.0x 12.2x 11.6x
Roche 13.2x 12.8x 11.7x 11.1x
GlaxoSmithKline 12.9x 12.6x 11.6x 10.5x
Merck & Co 11.6x 11.4x 11.7x 10.8x
Sanofi 9.3x 11.2x 10.8x 9.8x
Novartis 10.5x 11.0x 10.5x 9.4x
Pfizer 10.2x 10.7x 10.0x 9.6x
AstraZeneca 6.5x 8.9x 7.9x 7.6x

In comparison, the loss of Plavix appears on this metric already to be priced into the shares of its originator, Sanofi, while AstraZeneca's stock reflects multiple setbacks. The opening of such a valuation multiple gap can only indicate market confidence of near-term R&D success; so how well are Bristol and Lilly doing on this score?

In addition to the hepatitis C failure Bristol has endured the US rejection this year of dapagliflozin – the diabetes drug needs to undergo extensive additional trials if it is to have any chance of being launched – while brivanib failed in a head-to-head study against Nexavar in liver cancer.

True, brivanib has several shots on goal, the most advanced of which is colorectal cancer, in which it is in phase III studies. But consensus 2016 sales forecasts for dapagliflozin have shrunk from almost $700m a year ago to under $200m.

The X factor is the factor Xa inhibitor

However, the New York company is fortunate in having in its R&D pipeline the factor Xa inhibitor Eliquis, one of the industry’s most valuable projects with an NPV of $11.2bn (split with Pfizer). Even though Eliquis has been set back in the US it is still expected to be approved within a year or so once “data management and verification” issues are ironed out (Eliquis FDA setback turns up the heat on Pfizer and Bristol-Myers Squibb, June 25, 2012).

Bristol also scored a notable success last year with the US approval of the immunotherapy Yervoy for melanoma, an indication in which the drug is forecast to generate $1.8bn of revenue by 2018. While there is undoubted risk, therefore, it can be argued that the company has a pipeline to back up its premium rating.

Certainly its valuation seems nowhere near as rich as Lilly’s. Not only does Lilly have to contend with Zyprexa coming off patent this year, generics will hit its number two seller, Cymbalta, in 2013. At the same time, the company looks set to go two for three in late-stage neuroscience setbacks if the widely expected failure of solanezumab in Alzheimer’s disease adds to that of pomaglumetad in schizophrenia (After Lilly shrugs off schizophrenia failure pipeline must deliver, July 12, 2012).

Lilly’s future now rests on phase III data readouts over the next six months for two possible diabetes blockbusters, recombinant insulin glargine and the GLP-1 agonist dulaglutide, and the major depressive disorder project edivoxetine. But the company does not have a single R&D project in the industry’s top 10 by NPV, and is therefore likely dependent on multiple late-stage data successes (Biogen and Gilead top tables with most valuable R&D assets, August 8, 2012).

Perhaps Lilly’s reputation as a big R&D spender is one factor that gives analysts confidence. Both companies will soon find out how much of the cash they have thrown at R&D – and in Bristol’s case acquisitions – sticks.

All data sourced to EvaluatePharma

To contact the writer of this story email Jacob Plieth in London at jacobp@epvantage.com

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