On spend vs sales Pfizer is an outlier – but not always in a good way
Over the past 15 years Pfizer has spent an eye-watering $300bn on acquisitions, licensing deals and R&D, almost double the amount of its nearest big pharma brother. However, this huge investment has failed to make the company an outlier in terms of sales generated or share price performance – findings that should give pause to those eagerly awaiting its next big M&A move.
This is one conclusion that can be drawn from EP Vantage’s dissection of 20 years' spending and sales among the world’s biggest drug makers, an analysis of productivity that allows these companies’ relative performances to be compared. While Pfizer emerges poorly, Johnson & Johnson, Novartis and big biotech rank impressively, and it is intriguing to see how differently investors have rewarded strategies that, on the surface, appear to have been similarly productive (see charts below).
The chart below shows the share price performance of a cohort of big drug developers from 2003 to 2017, plotted against a productivity ratio we have called spend vs sales. This has been calculated from money in – spending on R&D, company acquisitions and the up-front portions of licensing deals from 2003 to 2017 – against money out – prescription drug sales, historic and forecast, from 2013 to 2024.
Ideally, a company would want to find itself in the top left corner – having spent a relatively small percentage of its sales on buying and developing medicines, and having been rewarded handsomely by investors with a rising share price.
The four big biotech companies we analysed all proudly sit in this high-achieving corner – this is to be expected for such supposed “growth stocks”. Still, it should be noted that this only concerns share prices to the end of 2017 – take into account Celgene’s annus horribilis and the beleaguered company becomes the worst-performing biotech.
These point-in-time analyses are useful up to a point, and the output will always change with events. So for example Sanofi’s 2018 buying spree is not reflected here – recent acquisitions would push the French pharma giant out towards Pfizer.
And of course should the famously acquisition-hungry US drug maker succumb to doing another mega-merger, Pfizer will become even more of an outlier. Still, it is notable that Bristol-Myers Squibb, the company most widely thought to be in its cross hairs, stands out as one of the most successful pharma groups, at least by the standards of this analysis.
Inputs vs outputs
The next analysis shows the numbers behind our spend versus sales productivity ratio.
The inputs span a 15-year investment period, from 2003 to 2017. And the numbers are huge – even the most prudent company, Bristol, spent $74.5bn in these years.
This investment period has been compared against cumulative sales starting from 2013 – thus incorporating a 10-year lag that we estimated would allow for a real impact on the outputs to be seen. Prescription sales as reported by each company are shown, from 2013 to 2017, as are forecast 2018-24 sales, based on EvaluatePharma's consensus of sellside forecasts.
Of course, measuring R&D productivity is always fraught with difficulties and caveats – the 10-year lag means some sales from the investment period chosen will be missing, so the reported number probably understates productivity to a certain extent. On the other hand, the period of forecast sales probably overstates productivity, because the sellside tends to be too optimistic about the future.
And of course this analysis says nothing about profitability, though the first analysis, taking into account investors’ response, provides some proxy.
These and other caveats notwithstanding, the chart above shows how these companies’ investment decisions have generated remarkably different results.
For example, Novartis and Pfizer are expected to generate similar levels of 2013-24 sales, though the thrifty Swiss pharma giant spent half as much as its profligate US peer.
Only Glaxosmithkline has spent less than Novartis as a proportion of sales – 27% vs 28% – though the first analysis shows how little investors think of the UK company’s strategy.
Of course this is only one way to measure productivity; a recent analysis of novel drug approvals found that a different cohort of companies performed well, though Novartis once again stood out (Merck cements its novel drug approval dominance, May 15, 2018).
Turning to biotech, it is notable how similar the profiles of Amgen and Gilead are – even though the former is living on huge, elderly franchises and the latter has largely benefited from its relatively recent move into hepatitis C.
Biogen stands out as the most successful on these measures, having only spent 16% of cumulative sales on R&D and acquisitions, compared with Amgen’s 20%, making the latter the highest biotech spender.
This year many of these companies have come under increasing pressure to step up business development to keep sales growing. With the prices of attractive assets still extremely high, this will not come cheap. Retrospective analyses cannot predict whether future acquisitions will work, but they can perhaps point to the management teams that have made smart choices.