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June 29, 2016
The pharmaceutical industry is buoyant as investors continue to reward new science
By: Anne O'Riordan

2015 has seen confidence continue to grow in the pharmaceutical sector, with a wave of new medications being approved.

There has been continued recovery in the first 11 months of 2015, with Enterprise Value (EV) up 6 percent—growing for the 5th year in a row, and average share prices for the peer set out-performed the main equity markets (5 percent above S&P500). Meanwhile, improvements in operating profit margins drove earnings up 12 percent, much faster than EV growth. The effect of this has been to drive Future Value negative again after briefly turning positive in 2014. This picture reflects continued investor confidence in the sector’s ability to achieve future growth driven by recent and upcoming new launches. However, it also reflects the increased polarization of performance at a company level between those now growing and those in transition.

Enterprise Value Pure Plays 2008-15

Investor confidence stems from the wave of new science being approved - FDA CDER New Molecular Entity (NME) approvals hit 45 in 2015, the highest since 1996. Average NME output 2011-15 was 62 percent higher than the preceding 5 years, and analysts forecast elevated levels to persist over the next 5 years. This NME output has driven the Pipeline Replacement Revenue Ratio markedly above levels seen in the 2011-12 “Patent Cliff.” Growth in this ratio is forecast to continue, reflecting recent and future launches replacing sales lost to off patent products. Sales facing IP expiry spiked in 2015, and is forecast to do so again in 2019. However this time around the IP expiry story is very different, with a large number of biological products facing expiry for the first time, and with sales erosion from biosimilars forecast to be much lower than the equivalent erosion of small molecule drugs.

Patent Exposure Pipeline Replacement

M&A Activity in Life Sciences remains at elevated levels, as companies make major strategic moves, to refocus on growth areas of the market (mostly specialty indications) and build portfolios with dominant market positioning. The high performing pharma companies have long been working on this, and continue to do so—whilst the rest of the industry is playing catch up, to find a path back to sustainable profitable growth. 2015 saw an estimated $271B in M&A deals, 25 percent below 2014 but still 100 percent above 2013 levels.

For more information on these findings, please read our latest High Performance Business Research: Affordability and value—the economics of pharma’s new science

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