SSR Health’s Hidden Pipeline Analysis: Relative Price and Value of pre-Phase III Pipelines

Richard

We believe pre-phase III (i.e. ‘hidden’) pipelines are misvalued for a very simple reason: they’re hidden. However because companies’ patenting behaviors around early projects are relatively consistent and complete, careful analysis of patent data gives us an opportunity to see what’s hidden, and to determine whether it’s fairly valued

On average, roughly 28 percent of the largest drug and biotech (by market cap) companies’ share prices are linked to these companies’ ‘hidden pipelines’, i.e. to projects in phase II and earlier stages of development

The percent of share price explained by a company’s hidden pipeline ranges from less than zero, to more than 50 percent. The amount of quality- and sales-potential adjusted innovation in these companies spans a similarly broad range, but in many cases the capitalization of a company’s pipeline will be low versus peers even though its pipeline contains more innovation than peers, or vice versa. For example BMY offers more than 12x as much hidden pipeline value per dollar of capitalization than peers on average; whereas NVS offers less than half as much

Since inception in November of 2011, our portfolio of stocks whose hidden pipeline misvaluations signal ≥20 percent relative share price movements has appreciated at 1.48x the rate of a comparator portfolio containing all 23 companies analyzed

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

Separately, we analyze relative rates of R&D productivity across companies, by year since 1994. We categorize all 23 companies by current relative measures of R&D productivity, and by whether R&D productivity is improving or deteriorating. JNJ, AGN, VRTX, ABBV and CELG all appear to have improving rates of R&D productivity that are already above the peer group average. Conversely PFE, SNY, and LLY all appear to have declining rates of R&D productivity and are already below the peer group average

For the first time, we’re able to systematically identify the areas of research (e.g. diseases, mechanisms) being pursued in each company’s hidden pipeline. We demonstrate this by identifying the 12 disease areas that constitute nearly 90 percent of the total innovation in BMY’s hidden pipeline, as well as the 14 disease areas being pursued by other companies, but not by BMY

All of the innovation, valuation, and R&D productivity measures in this call, plus hidden pipeline therapeutic area detail for all 23 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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