The common narrative of the biotech boom was one of innovative small and mid-sized companies with a single asset or programme that ramped up in valuation as investors fell in love with all things pharmaceutical.
A lesser-known story is the sellside appreciation of pipelines throughout big pharma as laboratories and business development came to life amid the biotech boom. Analysts now believe that this cohort’s R&D assets are worth a combined $225bn, representing growth of 53% since EP Vantage last did this analysis two years ago, and more than double in three years (see tables below).
This analysis looks at the value of R&D pipelines at big pharma by comparing the total NPV of their projects in development – covering those for which analysts have made forecasts – with products on the market, along with company market caps. It reveals which companies are heavily dependent on their pipelines – the NPV will primarily reflect late-stage assets – and which have balanced or aging portfolios.
AstraZeneca is a standout in this analysis, as the net present value of its R&D pipeline is equal to 35% of its market cap, up from 22% in EP Vantage’s 2014 analysis.
This growth is a reflection of the advancement of such projects as the immuno-oncology agents durvalumab and tremelimumab, and acquisition of a majority stake in Acerta Pharma and its acalabrutinib.
|Big pharma pipelines' NPV growth ($bn)|
|Jun 2013||Sep 2014||Aug 2016|
|Merck & Co||11.6||15.7||18.3|
|Johnson & Johnson||1.7||3.3||15.9|
Astra’s rise has been impressive, from near-worst in 2013 to near-best today – the attempted takeout by Pfizer in 2014 helped this uplift as analysts were forced to re-assess the company’s R&D efforts to justify its bloated market cap. The onus on the company now is to turn this into sales – particularly, as the table below also shows, that the company has the lowest-valued portfolio of marketed products among its peer group (Astrazeneca might have created value but now it needs to deliver, August 2, 2016).
Astra is not alone in having some potentially high-reward clinical catalysts. Lilly, the only other company from the traditional big pharma grouping valued at less than $100bn, is likewise highly reliant on its R&D strategy. In contrast with Astra, whose high-value assets are in well-validated classes, Lilly has a high-risk candidate in the Alzheimer’s project solanezumab, its second-biggest pipeline hope.
At $5.6bn in NPV this amyloid beta-blocking antibody has missed the primary endpoint on two pivotal trials. In a third due to read out by the end of the year the Indiana-based group has changed the primary endpoint, raising doubts over its promise (More sola uncertainty sends Lilly down, March 16, 2016).
Looking back on this analysis historically, one of the constants is Lilly’s position at or near the top of the table in terms of analysts’ estimation of the pipeline. Bristol-Myers Squibb plummeting from nearly the top to nearly last place is a consequence of its success with Opdivo, which moved from its pipeline and onto the market in this time. This is now worth a whopping $76.7bn according to the sellside, representing a huge proportion of the company’s value.
|The importance of R&D to big pharma's valuation|
|NPV of R&D pipeline ($bn)||NPV of marketed products ($bn)||Current mkt cap ($bn)||Implied investor disconnect ($bn)|
|Merck & Co||18.3||129.7||162.4||-14.4|
|Johnson & Johnson||15.9||146.4||344.5||-182.2|
Lilly and Bristol are both examples of companies where the sellside and investors pretty much agree on the value of the company. This is revealed in the “implied disconnect” measure, calculated by subtracting the sellside-derived NPV of a company’s marketed and R&D products from its investor sentiment-driven market cap.
This distinction is less meaningful for diversified groups such as Johnson & Johnson and Novartis because the NPV calculation does not include assets outside innovative human therapeutic drugs. For pure-play pharma groups it is more revealing.
Thus is seems that AbbVie investors have much lower expectations than the analysts who cover it – hence the $49m valuation gap. The explanation is that nobody knows for sure when Humira biosimilars will enter the market, and the rheumatoid arthritis treatment’s NPV of $87bn equals more than four fifths of its market cap. Investors are clearly less optimistic on a much delayed entry.
Meanwhile, this calculation reveals a tale of two companies at the top end of the table. Astra’s $35bn valuation gap, more than its pipeline NPV, shows how much investors are discounting its chances of success – meaning that valuations could increase if the pipeline performs.
On the other hand, the $2.5bn difference between Lilly’s combined NPV and its market valuation shows how vulnerable it could be to failure of solanezumab or a stumble by abemaciclib.
With the exception of Bristol, which has enjoyed unequivocal clinical success, every company in this analysis has seen pipeline valuations grow since 2014. Whether this is a sign of R&D health or a lingering vestige of the biotech boom’s exuberance will become clearer as high-value assets yield clinical results in coming months.