An Index of the Value in Large Cap PharmaCos’ Mid- to Early-Stage Pipelines


Pre-phase III pipelines in some cases represent more than a quarter of a company’s enterprise value (EV). Companies’ disclosures of pre-phase III details are extremely limited, thus the market cannot reliably value a substantial percentage of EV using traditional information sources

Because companies’ patenting of early pipelines is extremely thorough, patents and related data allow us to estimate the relative amounts (and qualities)of innovation in companies’ pre-phase III pipelines

We estimate the market value of pre-phase III pipelines by subtracting the estimated present value of on-market, registered, and phase III assets from EV; the remainder is the apparent market value of pre-phase III products. We then compare each company’s ‘intangibles’ EV to an estimate of the amount and quality of innovation in each company’s pre-phase III pipeline. On this basis BMY and Roche appear more than 10 percent undervalued versus peers; PFE, GSK, and MRK appear more than 10 percent overvalued versus peers. Given typical rates of progression in pre-Phase III pipelines, we expect these valuation effects to unfold across a +/- 4 year period

As context, average rolling 4 year relative performance (’02 – ’12) of individual large cap drug stocks versus the DRG is slightly more than 17 percent. We believe estimates of ‘intangibles’ EV to quality adjusted patents should feature prominently in drug stock selection for investors with longer holding periods

Because we expect large pharmaceutical companies’ US pricing power to weaken over the next several years, the relevance of product flow as a percentage of total available earnings growth is likely to increase substantially; this further increases the importance of carefully valuing pre-Phase III pipelines

Our quality-adjusted patent index also allows us to create two contemporary measures of R&D productivity at the individual company level: R&D dollars spent per adjusted patent; and, the relative rates of new quality adjusted patent formation and the loss of quality adjusted patents to expiry. BMY, SNY, and Roche appear to produce substantially more innovation per R&D dollar than peers; LLY substantially less. BMY, SNY, and AZN appear to have much better ratios of new adjusted patents being won to old adjusted patents being lost than peers; LLY’s ratio is much worse than peers’

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

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