Relative Price and Value of pre-Phase III Pipelines for the 22 Largest Drug & Biotech Companies

Richard

Please see the SSR Health YouTube Channel for a detailed video walk-through of this research note

We believe pre-phase III (i.e. ‘hidden’) pipelines are misvalued for a very simple reason: they’re hidden. However because companies’ patenting behaviors are consistent and complete (and begin at early stages of discovery), patent data allow us to see what’s otherwise hidden, and to determine whether it’s fairly valued

The percent of share price explained by a company’s hidden pipeline ranges from less than 10, to more than 50 percent (average +/- 31 percent). The apparent value of innovation in these companies’ hidden pipelines spans a similarly broad range, but in many cases the capitalization of a company’s pipeline will be low v. peers’ even though the apparent value of its pipeline is high v. peers’, or vice versa. For example BMY offers more than 4x as much hidden pipeline innovation per dollar of capitalization than peers on average; whereas NVS offers about half as much

Because hidden pipelines account for a large percentage of stock price, and because hidden pipeline valuations are less certain (i.e. more volatile) than other components of share price, hidden pipeline misvaluations should heavily influence relative performance. Since inception in November of 2012, our portfolio of stocks with undervalued hidden pipelines has outperformed peers by more than 1.5x

Because of large misvaluations in hidden pipelines, shares of VRTX, BMY, and AGN all appear at least 20 percent undervalued. Conversely shares of NVO, SHPG, BIIB, CELG, REGN, ALXN, and GILD all appear at least 20 percent overvalued

All of the innovation, valuation, and R&D productivity measures in this call, plus hidden pipeline therapeutic area detail for all 22 companies analyzed, can be found in our proprietary ‘Hidden Pipeline’ information product, available by subscription

For our full research notes, please visit our published research site

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