When is big pharma no longer big pharma?
After a bruising few months for GSK, 17 global drug makers now have a higher market cap than the UK company.
A lot of time is spent, in the various corners of the biopharma industry, comparing the relative performance of drug makers. Companies are placed in peer groups to make those comparisons as fair as possible – but on what basis should those peer groups be built?
Take “big pharma”, which according to Evaluate Vantage’s definition makes up an 11-company cohort, highlighted in the table below. This was constructed many years ago based on market cap and the diversified nature, in terms of therapy areas addressed, of each business. Considering recent shifts in strategy and valuations, does the big pharma group need a shake-up?
GSK’s stock market decline has prompted this question. The company became smaller after spinning out its consumer division earlier this year, but its valuation has also been hit by a series of pipeline blow-ups and the threat of Zantac litigation. All of this means that 17 global drug makers now have larger market caps.
Take Vertex and Regeneron, for example. These biotechs are forecast to generate a fifth of the sales of GSK this year, but boast higher valuations because investors consider them growth stocks. Neither pays a dividend, they are more focused therapeutically and they invest a lot less in R&D than traditional big pharma.
As such, there are few arguments to be made in favour of these two developers joining the big pharma cohort.
Neither do the conglomerates Merck KGaA and CSL strictly fit the bill. The former's pharmaceuticals business, which generated annual revenues of $8bn in 2021, is small compared with more pure-play developers. CSL's pharma offering is also relatively small, although the Australian vaccines and blood products group is one to watch for the future, should it move further into therapeutics, building on its recent acquisition of Vifor and deal with Uniqure over Hemgenix, a haemophilia gene therapy.
|Whither big pharma?|
|Total group revenues ($bn)|
|Market cap ($bn)||2021||2028e||2021 R&D spend* ($bn)|
|Johnson & Johnson||460.1||93.8||113.6||11.8|
|Merck & Co||267.8||48.7||78.5||10.1|
|Bristol Myers Squibb||167.9||46.4||46.8||9.5|
|Evaluate Vantage's current big pharma cohort in bold. *Pharma division R&D only, where relevant. Market cap at Nov 21, 2022. Source: Evaluate Pharma.|
Gilead, Amgen and Novo Nordisk are harder to call. They are similar in size to the smaller of the big pharma pack in terms of sales – particularly, for the Danish group, on forecast 2028 revenues. But they still spend less on R&D than traditional big pharma.
On portfolio spread it could be argued that these developers are less like big pharma. They are all much more focused therapeutically than, for example, J&J or Pfizer, although all are attempting to diversify. Do these efforts need to pay off before these companies are elevated to the big pharma cohort?
Perhaps the real question is whether GSK should be relegated. Until the Zantac cloud lifts such a move is probably premature. Should the company break itself up further, a move that has been mooted by unhappy investors, a demotion would probably become inevitable. A further consideration is M&A – some believe that the beleaguered group is vulnerable to a bid – in which case the GSK question would become irrelevant.
Either way, one of the most remarkable statistics about the big pharma group can actually be found at the top of the table. This concerns Lilly, which sits in second place in terms of market cap, despite being 11th, at the bottom of the big pharma pack, on 2021 sales. The group’s valuation is based on expectations of growth: over the next decade Lilly’s top line is seen growing faster than its peers.
Whether the valuation is justified depends on the group's diabetes and obesity drug Mounjaro, and donanemab for Alzheimer’s, as well as a handful of other recent successes, living up to very high hopes.
In the meantime, Evaluate Vantage's big pharma pack will remain 11 strong. But for the first time in many years it feels like this cohort is heading for change.