R&D Investment Returns Decline
BMI View: In the face of slower global pharmaceutical market growth, pharmaceutical companies will continue to invest in research and development (R&D) to maintain competitive advantages in generating sales from the lucrative innovative drug market. However, their R&D spending is less productive in terms of launching next generation blockbuster drugs. From an investment perspective, the industry is offering a stable dividend yield and some of the companies seem to be undervalued in comparison with its peak time in 1990s.
BMI's pharmaceutical expenditure model reveals that the global pharmaceutical market is to increase from US$1.08trn in 2012 to US$1.11trn in 2013 - a rise of 2.7%. In our five-year-market forecast, growth will continue at a 3.5% compound annual growth rate (CAGR), with sales reaching US$12.9trn by 2017. It is slightly slower than the previous five-year CAGR (4.6%). We believe that the global trend of increasing non-communicable disease burdens and ageing populations spending more years living with injury and illness will provide revenue-generating opportunities for the pharmaceutical industry. However, multinational pharmaceutical companies are facing increasing challenges from the patent cliff, healthcare cost containment by governments in developed states and higher regulatory barriers.
|Deceleration In The Next Five Years|
|World Pharmaceutical Market Outlook (US$bn)|
It is therefore crucial that multinational drugmakers invest in R&D to maintain a competitive advantage in generating sales from the lucrative innovative drug market. According to R&D spending data from Bloomberg (based on the most recent full-year figures published in financial reports from the top 100 publicly-traded companies worldwide), eight out of the top 20 R&D spenders in 2011 were pharmaceutical companies. In terms of R&D spending as percentage of sales, Roche, Merck & Co, Novartis and AstraZeneca ranked the top four R&D spenders in 2011.
|Heaviest Spending In R&D From Pharmaceutical Industry|
|World Top 20 R&D Spenders In 2011 (US$bn)|
However, according to a study from Deloitte and Reuters, returns from pharmaceutical R&D have reduced. By estimating the projected financial returns of the investment in their late-stage pipeline, the cohort of internal rate of returns (IRR) from the analysis of the top 12 pharmaceutical companies declined from 10.5% in 2010, to 7.7% in 2011 and 7.2% in 2012. The research has also unveiled that although the number of new compounds entering the late stage pipeline and the number of approvals increased during the period studied, the total sales value of all approvals declined. In relation to the R&D productivity, late-stage success rates remain a key focus for the industry, in order to improve returns.
Still A Worthy Investment?
Currently, the average P/E ratio for the top 10 multinational drugmakers (14) is at a historical low compared with its peak in the 1990s (38 in 1999). Abbott Laboratories and AstraZeneca seem significantly undervalued compared with their global peers, with P/E ratios of 6.5 and 9.9 respectively. From an investment perspective, the two companies have paid 5.1% and 6.6% dividends, with operating margins of 20.4% and 36.1% respectively. However, product pipelines, operational efficiencies, as well as emerging market performance are also important factors in determining a pharmaceutical company's commercial success.
|Declining Over The Past Decade|
|Average P/E Ratio Of Top 10 Pharmaceutical Companies By Market Cap|