Over the last year, since our 2014 High Performance Business Study of the Pharmaceutical Sector, we’ve seen confidence continue to build in the industry as a result of the approval of innovative new drugs. Investors continue to reward the most differentiating science, particularly in specialty areas of the market, and new science-driven launches are capturing more attention from investors than emerging markets despite their continued double-digit growth forecasts.
Growth and investor confidence are back
Our 2015 research shows the industry’s Enterprise Value is up 11 percent, reaching 36 percent above the pre-recession peak of 2007. Share prices have had a mixed performance at the company level, but overall the ARCA Pharma Index has outperformed the S&P 500 by approximately 5 percent over a two-year period. This improvement in valuation has increased the industry’s Future Value as a percentage of Enterprise Value from -6 percent of Enterprise Value, at the end of 2013, to +2 percent this year—marking the first time Future Value as a percentage of Enterprise Value has been positive since 2007.
These shifts reflect increased investor confidence that the pharmaceutical sector is returning to sustainable future growth, driven by recent and upcoming launches that are making the news. For example, CNN recently reported on a study that discovered that a combination of two drugs could help our immune systems fight cancer. Cancer immunotherapy was also a top focus at ASCO and an article at Forbes reported that the biggest selling cancer drugs in 2020 indicate we can expect significant change in five short years.
The wave of new science is coming at a cost
However, operating margins have been falling for the last two years with industry core EBITDA/revenue down 3 percentage points to 32 percent in the third quarter of 2014. The operating margin at a majority of the peer group companies studied (11 of the 16 companies) fell over the last two years.
In addition to slipping operating margins, there is also the issue of affordability. Current forecasts estimate that developed markets will spend an additional $125 billion on pharmaceuticals between 2014 and 2019. This is 34 percent less than the $190 billion analyst growth forecast for recent and upcoming New Molecular Entity (NME) launches over the same period. As a result, payers and governments will continue to seek greater savings from generics, since their drug spending as a proportion of total health spending is already creeping up.
But it’s not just payers and governments affected by affordability. The cost of cancer treatments is bankrupting some patients, the Financial Times is reporting on the unhealthily high price of cancer drugs, Reuters reports that the number of Americans using $100,000 in medicines each year has tripled in the last year and NBC News is reporting that the drug market is “utterly broken.”
Delivering on the promise of new science, with sustainable profitable growth
The key challenge facing the industry will be how to deliver on the commercial promise of new science, while generating sustainable profitable growth. Other questions we must ask are: How do we cut the cost of cancer? And how do we address the dilemmas thrown up by the war on cancer?
Our research suggests that High Performers may have some of the answers. With their strategic focus on bringing innovative new science to market in key growth therapeutic areas and their ability to do so in a cost effective way, they obviously have some lessons to teach us. At least four operational attributes and capabilities distinguish High Performers from their peers:
Pharmaceutical companies that can embrace these capabilities and drive operational change to keep pace with innovation will be the most likely to flourish in the coming years.
To learn more, download the report: Turning science into value