Large Pharma’s ‘Established’ & ‘Growth’ NEWCOs: A Solomonic Path to More Efficient R&D?
We divided the large cap pharmaceutical companies into ‘established’ and ‘growth’ NEWCOs; we then compared the combined value of the ‘established’ and ‘growth’ NEWCOs to the legacy parent companies, and found no compelling evidence to believe the combined NEWCO values are any higher than the market values of their respective ‘legacy’ parents
The growth NEWCOs are dramatically smaller (average 32 percent of legacy revenues) than their parents. For the growth NEWCOs to have R&D / sales ratios on par with comparable existing biopharma growth companies, the average growth NEWCO would have to reduce its absolute R&D spending to a level 53% below that of its legacy parent. The negative implications for research tools and services companies (e.g. CRL, CVD, ICLR, LIFE, PLL, PRXL, QGEN, TECH, TMO, WAT) are obvious
The growth NEWCOs are much more reliant on US real pricing power than comparable existing biopharma growth companies … that is to say the ‘quality’ of the growth NEWCOs’ growth arguably is less than that of the comparables. This raises the question of whether the growth NEWCOs would be valued at par with the comparables, and challenges the core value-creation logic of proposed splits
The only benefits we see from breaking legacy companies into ‘established’ and ‘growth’ NEWCOs derive from the impact this has on R&D spending. Simplistically, because economic returns to R&D spending are on average negative, as long as this is true less R&D spending obviously is (economically) better. And, because economic returns to R&D spending are negatively correlated with scale, the significant rescaling of R&D implied by splitting legacy companies into ‘established’ and ‘growth’ NEWCOs might reasonably be expected to raise the productivity of the R&D spending that remains
Splitting legacy companies into ‘established’ and ‘growth’ NEWCOs is not the only path to lower R&D spending, and lower R&D spending is not the only path to better R&D productivity. We prefer the more ambitious approach of tackling R&D productivity by alternative means that do not require sacrificing non-R&D scale advantages
For our full research notes, please visit our published research site