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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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In the Pipeline

« Chemistry Jobs, Present and Future | Main | The Solid Phase »

December 13, 2010

Big Pharma's Lost Stock Market Decade

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Posted by Derek

Talking about Pfizer's stock price the other day let several people to note in the comments that it's not just PFE stock that's had a bad ten years: a lot of other big drug companies have, too, including some (like Lilly) that have very much declined to grow by merging. And it's true, as this chart will show.
drug%20company%20stock%20chart.jpg
This is a sampling of some big US-based pharma companies that have been around during the whole ten-year span. Note that J&J is actually ahead of the index (in red), and it and Abbott are the only two that can claim that distinction. (They're also the only two on the list with a significant medical devices/diagnostics presence - coincidence?)

The pure drug plays have all been pretty rough. Merck, Bristol-Myers Squibb, and Lilly are right down there with Pfizer. What I was trying to get across the other day, though, was not that Pfizer had been awful relative to its peers, but that it's been just as bad. All that merger activity, all that turmoil, has come down to this: same lousy performance as the other big companies. What, from an investing standpoint, has it done for anyone?

Now (as was also pointed out in the comments last week), these charts neglect reinvested dividends, but an S&P index fund's performance would also show some effect from that, too (although not as large as for some individual stocks, for sure). Another big point: we'll never be able to run the control experiment of dialing back the time machine and letting Pharmacia/Upjohn, Warner-Lambert, and Wyeth all stay un-Pfizered. (Not to mention what Pfizer might be were it to have remained un-super-sized). There are too many variables. All we can say is that there's no evidence that any of the big boardroom-level strategies have been superior to any other.

But given the way drug discovery has been going the last ten or fifteen years, it's hard to see anything making such charts look good, mergers or no mergers. That brings up a causality problem, too - it's important to remember that while mergers don't seem to have been doing any favors for drug research, the existing problems of drug research are what have led to many mergers. What was it that David Foster Wallace once said - that the definition of a harmful addiction is something that presents itself as the cure for the problems it's causing?

Update: in case you're wondering if this is just an effect of starting ten years ago (when the market was much livelier), you can use that Google Finance link to move the starting point back. From what I can see, you have to go back to 1994 or 1995 to find a point at which most of the drug stocks would have outperformed the S&P 500 (and as that last-ten-year chart shows, all of that happens early). Merck lags for a long time, and Bristol-Myers Squibb and Lilly still aren't above the line even if you start in the mid-1980s.

Comments (32) + TrackBacks (0) | Category: Business and Markets | Drug Industry History


COMMENTS

1. Anonymous on December 13, 2010 3:18 PM writes...

Errr - what happened towards the end of 2008

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2. Anon on December 13, 2010 3:19 PM writes...

What do you think would have happened to some of the stock prices if the mergers / buyouts had not taken place? Great upward trends? Nope. Just more of the same, and probably in some cases even greater downward slopes as there would have been less ability to contain costs, consolidate business units, etc.

Mergers, acquisitions are indeed painful. I am not defending them, or defending companies that have tended to be more involved in these activities than others, but stop trying to lay blame on actions that are not really the underlying cause of Pharma's woes: increased costs, increased drug prices, pressures by consumers, greater scrutiny by regulators, some amount of self-created (by Pharma) bad decisions and actions, less year to year success in approvals of NCEs......it's not in the mergers themselves.

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3. Curt F. on December 13, 2010 3:28 PM writes...

The cute reference to DFW is inapt, because as all the rest of the post acknowledges, we don't actually know if all the mergers are "problems", much less if they are "causing" the decline in stock market value.

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4. Mark on December 13, 2010 3:38 PM writes...

Is it fair to use 2001 as a starting point? The stock market was pretty overheated at that point and a lot of stocks were over-valued.

Mark

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5. Hap on December 13, 2010 4:08 PM writes...

Except the only cure for the lack of a pipeline is to acquire another company. In the long run, if you buy up all of the productive companies and get nothing (not stock value or drugs or useful research capacity), it sure seems like a solution generating its own problem. Failure to innovate at least only kills the parent company, while the "swallowing yourself to success" model kills the kids, too.

Put another way - the companies acquired were likely more effective than the ones that acquired them. Paring off the top half of the pharma company stock yields means that while those who are left suck, the ones that didn't swallow other companies didn't remove any productive capacity to do so.

Also, the reference is not in fact inapt. DFW is arguing that TV makes lonely people lonelier because it displaces their possible interactions with people that could truly make them less lonely, while claiming to give them friends which it can't in fact give. The analogy to mergermania seems precisely apt - it claims to improve pipeline development by streamlining it, while not providing the promised dividends and destroying actual productive capacity. At minimum, it advertises itself as a solution to problems it can't solve. In the long run, it creates those problems, unless the capacity eaten up and spit out is regenerated elsewhere. (I like that essay a lot).

Eating the seed corn because you don't have anything better to do is a pathetic way to die.

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6. Diversification on December 13, 2010 4:09 PM writes...

Since Derek pointed out the link between J&J and Abbott's better showings and their diversified product lines, here's something to digest from FiercePharma:

http://www.fiercepharma.com/story/gsk-nabs-maxinutrition-reckitt-pays-726m-paras/2010-12-13

GSK nabs Maxinutrition; Reckitt pays $726M for Paras

A couple of consumer-health deals underscore pharma's ongoing rush to diversify. First, GlaxoSmithKline ($GSK) has bought a protein-drinks firm, Maxinutrition, for 162 million pounds ($255.7 million), to help complement its nutritional drinks businesses. The deal will help GSK with its ongoing bid to pump up its consumer healthcare business, CEO Andrew Witty told Reuters.

Meanwhile, Reckitt Benckiser, the U.K. consumer products and drugs company, has agreed to buy--some say agreed to overpay--for a consumer healthcare business in India. Reckitt will pay some $726 million, or 8.2 times sales, for Paras Pharmaceuticals, which makes ointments, OTC remedies and other personal care products.

Pretty soon GSK --> GNC --> GMC???

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7. CR on December 13, 2010 4:15 PM writes...

@Anon #1:

"Errr - what happened towards the end of 2008"

That would be Lehman Brothers, moral hazard, etc.

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8. JasonP on December 13, 2010 4:38 PM writes...

JNJ at the top woot! It's good to be king. For a change.

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9. pete on December 13, 2010 5:42 PM writes...

If your frame of ref. was early - late 2009, they all did smashingly well. Psst, wanna buy some more?

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10. dearieme on December 13, 2010 6:10 PM writes...

"Eating the seed corn because you don't have anything better to do is a pathetic way to die." If you fancy a historical analogy, consider the extinction of the human population of the remote Scottish island of North Rona. Rats swam ashore from a shipwreck and ate all the stores.

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11. Jumbo on December 13, 2010 6:41 PM writes...

Maybe the answer to where things are headed is to go to the chart link and add Teva to the pharma companies. You will see quite a difference in performance. And just to prove it's not a NASDAQ phenomenon, add the NASDAQ index and prove that the S&P and NASDAQ indices both performed similarly over that time.

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12. azetidine on December 13, 2010 8:22 PM writes...

I'd like to know if it is even possible to make money, going forward, by inventing small molecule drugs. Based on how much money it takes to get a drug from the bench to the market, and how much said drug would return in net profit after manufacture and marketing, how many potential drugs even exist that would make back their investment? (And no, "miracle" cancer or Alzheimer's cures don't count).

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13. Anonymous on December 13, 2010 9:17 PM writes...

azetidine

Small molecule drugs that address true unmet medical needs for small orphan populations are the way to go.........there are plenty of diseases that have no or poor treatment options and the US government has plenty of carrots to offer a company that develops drugs in this space...........BIG pharma's real problem is one of scale. They can do some things well but maybe they are past their innovation prime.

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14. Anonymous on December 13, 2010 9:25 PM writes...

The consolidation of pharma was discussed two decades ago in Script, and it has played out pretty much on schedule and as projected back then. I really do not understand why Abbott, Lilly, Bayer and BMS are still alive at this point.

The beneficiaries of this consolidation were the stockholders, AKA the owners, of the companies being sold. As an owner of many of the pharma companies that have been sold, I can tell you I made a great deal of money in most of these acquisitions. Unfortunately as an owner of many of the acquiring companies as well, I have to say I have regretted holding their stock after these big mergers.

Pfizer made three very serious mistakes in their takeover strategy. The first was that they did not cut staffs, sites and programs aggressively enough to get the full value of their acquisitions. This should have been about products and shelf space nothing more. They should never have kept the Warner-Lambert R&D site open or continued to invest in it, for example. They should have stripped out the products and any other valuable assets then axed people including all of R&D and shuttered the rest. This should have been done within a year of purchase. These mergers only really work if the plan is scorched earth. Pfizer did not implement that strategy until the Wyeth purchase.

The second mistake Pfizer made was that they let their R&D budget balloon to $7 billion per year. They should have kept it in the more modest $2-3 billon range, and kept their own R&D staff small and focused on doing what they were so successful at doing in the 80's. They should have had an un-breachable firewall between their R&D guys and what was going on in M&A. The Pfizer R&D folks should never have had to think about the soon to be terminated R&D folks in the acquired company. These mergers became a total distraction for Pfizer R&D people. Any integration was a failure, plus the constant termoil caused by all these mergers ruined Pfizer's R&D focus.

The third Pfizer strategy failure was the use of stock in these purchases. This led to very significant dilution. This may have been OK if the profits of Lipitor and their other patented blockbusters were going to last forever, but it was plain as day that was not going to happen. Pfizer should have used their profits from the saving realized in the mergers plus those from not binging on R&D to aggressively buy back their stock which was so heavily diluted with each acquisition. They also could have used their one-time repatriated ex-US profits to repurchase their stock. They probably should not have sold off their OCD to J&J, although I believe that money may have been used in Wyeth purchase. It probably would have been better in retrospect to have stayed diversified especially with so much impending pressure on drug pricing.

Had they made these moves, there would have been far fewer shares out standing when Lipitor hits the wall, their profits would be higher, their stock valuation higher and if things did not work out in their laboratories, they would be an easy purchase for J&J or ....

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15. azetidine on December 13, 2010 9:35 PM writes...

#13:

I agree that new drugs for small orphan populations that address unmet medical needs would be a wonderful thing. But if it is going to take US government intervention to make it possible, doesn't that just support my hypothesis that there are little to no drugs of the future that would pay for themselves of their own accord?

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16. matt on December 14, 2010 12:55 AM writes...

Is the glass half empty?

If you included AZN, BAYRY, RHHBY, SNY, NVO, NVS, GILD in that same picture, would you draw the same conclusion? Or are these not "big pharma"?

Novo Nordisk is a four-bagger over the last ten years. Novartis and Roche (RHHBY is distorted by stock splits at google, use adr.com) are up significantly. Big pharma isn't dead, it's just changing a lot.

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17. chris on December 14, 2010 2:35 AM writes...

Perhaps add Apple for comparison.

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18. Cassandra on December 14, 2010 5:16 AM writes...

What do stock prices actually reflect? We industry insiders seem to presume that investors have some insight in the quality of a Pharma company's R&D strategy and the value of the products in its pipeline. A glance at financial market blogs and publications shows that that is very much the exception. The assessments in there tend to be of the nature that "Company X has a difficult time now but historically it has always been a solid investments and I am confident that they will recover."

Don't forget how little investors actually know. It isn't just that they are not chemists. The highly public and humiliating Tylenol debacle at J&J has produced one Congressional hearing with some interesting half-revelations and a grand total of one (1) investigative article, by a CNN Money journalist IIRC. Otherwise there has been successful stalling and evasiveness, and a lot of very ill-informed blogging (none of it by Derek).

As both an employee and a small shareholder, my short-term interests may be served by investors knowing so little, in case leaking of more bad news would negatively affect shares. But my long-term interests would be a lot better served by having more knowledgeable investors, who can judge the value of a company's R&D and products, instead of extolling the virtues of linear cost-cutting, mergers, and lay-offs.

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19. Lauran on December 14, 2010 6:52 AM writes...

Cassandra Said:

"But my long-term interests would be a lot better served by having more knowledgeable investors, who can judge the value of a company's R&D and products, instead of extolling the virtues of linear cost-cutting, mergers, and lay-offs."

Looks like you know as little about my job as an investment analyst as I do about yours in R&D. I didn't realise my job was to keep you in yours.

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20. processchemist on December 14, 2010 7:39 AM writes...

@19

I'm a bit curious: in your job how do you valuate the mid/long term perspectives of a pharma stock? Analysises of the the stock performance?

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21. You're Pfizered on December 14, 2010 8:48 AM writes...

8-King of what? Total amount of products recalled in one year? Consent Decrees coming their way?

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22. Nick K on December 14, 2010 9:14 AM writes...

Even more shocking to me than the poor performance of Pharma since 2000 is the fact that the US bourses have not made any advance in a decade. What has happened to the most dynamic and creative economy in the world? Why is it not generating wealth for the shareholders?

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23. MTK on December 14, 2010 9:21 AM writes...

@16 matt,

As I noted in the previous post's comments, the seemingly better performance of many of European companies has little to do with the company, but is more of a reflection of currency exchange rates. In Dec. 2000 the Euro to USD rate stood at 1.12. It's now around .74

So while companies such as NVO have done very well, others like Roche and GSK have in reality done no better than LLY, MRK, or PFE, but rather have risen the tide that lifted all the Euro stocks. So yeah, you made money on them relative to LLY and MRK, but primarily through geography rather than strategy or superior company performance.

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24. Anonymous on December 14, 2010 9:45 AM writes...

@20:

Good question and the short answer is not at all. If I was to make a call on a pharma stock for a long term holding (assuming I'm a growth investor) I would base it not on past stock performance but of my own analysis of the company's ability to grow earnings in the future. This ability would be predicated on the quality as I understand it of the firm's pipeline (this includes the quality of its research based on what little info outsiders can get), quality / competency of management, the firm's competitive advantage in terms of existing drugs, and the firm's present and potential future financial state.

No, I'm not an expert but I spend a lot of time trying to understand what makes a particular company's R&D special or otherwise. There are many good pharma analysts out there...many of whom have worked in the industry or have a "science" background...but it should be remembered that analysing drug development is as difficult as doing drug development. All of us, scientists and analysts, are shooting at a moving target and all of us are trying to better our processes. I know our goals often come into conflict with each other and there's no getting around thisbut to call us not knowledgeable as Cassandra did is a bit short sighted. Mis-aligned perhaps but not lacking in knowledge. It's important for people within an organisation to remember that people without this organisation are privvy to very little knowledge as to the company's soft factors like quality of people / research and nuances of culture.

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25. processchemist on December 14, 2010 10:33 AM writes...

@24

The more I get in touch with banking/investment/VC people the more I realize that only the ones who have analysts with a solid scientific background in the specific field can get a decent picture.
And when I say "specific", I mean it: hard to have solid valuations from a chemist on a bio product, same results asking to an oncology expert about a pipeline focused on the respiratory field.
The effects of single patent expiration too are badly understood, in most cases. (Why PFE will be forced to say goodbye to their lipitor revenues, while other blockbusters gone generics obtained little competition?).
On the other side I'm aware that stock values don't automatically reflect the reality of a company, so maybe when a banker I know says that this is the time to invest in big pharma stocks, probably he is right also if I think it's totally wrong.

Permalink to Comment

26. Derek Lowe on December 14, 2010 10:53 AM writes...

Currency fluctuations are indeed the biggest reason I left out the European-based companies. It's also not quite accurate to compare the stock prices of US companies to those from Germany or Switzerland, who often have different financial structures and can be less equity-focused.

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27. Mike G on December 14, 2010 11:17 AM writes...

#6 - when pharma de-diversified a dozen years ago, food and nutritionals were among the first businesses to be shed. Roche got out of flavors and vitamins, MRK got out of alginates and biogums, PFE got out of acidulants, etc. Now they're rushing back in. Deja vu all over again.

#23 - If you're right that Roche hasn't fared much better than LLY, MRK and PFE over the past decade, then that undermines the theory that diversification into Dx has buoyed J&J and ABT. I wonder what role molecular Dx in particular (as opposed to non molecular in vitro tests) has played in the more recent performance of Roche, JNJ, and ABT?

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28. Lauran on December 14, 2010 12:12 PM writes...

@24:

"On the other side I'm aware that stock values don't automatically reflect the reality of a company"

absolutely...and your banker friend is trying to exploit the market's mis-pricing. It's what we're all trying to do in fact....ahh the sweet smell of arbitrage!

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29. victorypilsner on December 14, 2010 1:31 PM writes...

My belief is that the single most detrimental thing that has happened to the pharmaceutical industry in the past 10-15 years is the allowance, and subsequent explosion, of direct consumer to marketing advertising (DCMA). The benefits of awareness have been far outweighed by the damage to the nature of what pharma companies should be. Discovery of medicines is an uncertain and discontinuous process and leaders of pharma companies need to have that experience first hand. I think DCMA has ultimately caused the leaders of pharma companies, for the most part, to be first and foremost sales and marketeers concerned with quarterly profits not long term investment in discovery. Mergers are a symptom of this transformation, and stock prices reflect chasing short term fixes at the expense of long term gain. The idea of enlightened capitalists concerned with long term research may sound hokie to some, but I think that if we had not had the advent of DCMA, we would be far better off and advancing more medicines to treat unmet medical needs (that would ultimately yield big profits).

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30. DrSnowboard on December 15, 2010 12:34 AM writes...

My grasp of investing voodoo is poor, but common sense would suggest that a pharmaceutical company's life is cyclic, but wants to pretend to investors that they have a surefire method of discovering a blockbuster. So when times are good, they spin that they need all their resources directed at making the most money in specialty pharmaceuticals and they ship out all those unloved cash cow brands that are outside their 'core' business. They underestimate the risk of being based on a cyclic, creative business. They believe they are winners.
When times are hard, they love those cashcow brands and departments, because they realise they dampen out the boom bust cycles and give themselves more room in a market that wants to make more money still. They believe they are survivors.

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31. britt johnston on December 15, 2010 6:00 AM writes...

@26 The point is definitely valid for Europe too. The shares of European firms have not grown either. Another indicator might be total sales, which for Roche (29 -> 48 B$)and Novartis (19 -> 50B$) have roughly doubled from 2001 to 2010. That reflects on the next problem though - customers don't want bigger cigars, they want cheaper ones.

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32. ny10059 on December 15, 2010 10:22 AM writes...

Forest has well-established franchises in the therapeutic areas of the central nervous and cardiovascular systems

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