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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: Twitter: Dereklowe

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March 27, 2014

A Look Back at Big Pharma Stocks

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Posted by Derek

Four years ago, I wrote about what I called "Big Pharma's Lost Decade" in the stock market. I thought it would be worth revisiting that, with some different time points.

At the top is the performance of those same big drug companies since I wrote that blog post. Note that Bristol-Myers Squibb has been the place to be during that period (lots of excitement around their oncology pipeline, for one thing). Pfizer has beaten the S&P index over that time as well. And they've done it while paying a higher dividend than the aggregate S&P, too, of course - I'd like to find a way to include dividends into charts like these for an even more real-world comparison. Everyone else is behind.

The next chart shows a ten-year time frame. Bristol-Myers Squibb is still on top, although you'll note that the overall gain is basically the same as the gain since 2010 (that is, it's all come since then). And now J&J is right behind them, and they're the only two whose stock prices have beaten the S&P index over this period. Note that Pfizer and Lilly are actually down from this time point.

Then we have performance since 2000, the twenty-first century chart. Since this was during the Crazy Years in the market, just about everyone is down when measured from here, except for J&J (which is at about the same gain as if you'd started in 2004). The most dramatic mover is Bristol Myers-Squibb - if you bought in at the start of that last chart, you're up 109%. If you bought in at the start of this one, you're down 21%.

And that brings us to the last chart, which is basically "Since I started working in the drug industry". I'd been on the case for about three months by the end of 1990, which is where this one starts. And there are many interesting things to note - first among them, what a big, big deal the latter half of the 1990s were in the stock market. And more specifically, what a big, big deal they were for Pfizer's stock. Holy mackerel, will you look at that chart - compared to the rest of the industry, Pfizer's stock was an absolute monster, and there you have a big driver for all of the company's merger-rific behavior during that period. It paid. Not so much in research results, of course, but it paid the shareholders, and it paid whoever had lots of PFE stock and options. (And it paid the firms on the Street who did the deals with them, too, but that's always the case for them). A really long-term Pfizer shareholder can't be upset at all with the company's performance versus the S&P over that time period. How many have held it, though?

But the other thing to note is J&J. There they are again - it's only in that first chart that they're lagging. Longer-term, they just keep banging away. That, one would have to assume, is at least partly because they've got all those other medical-related businesses keeping them grounded during the whole time. Back when I worked for Bayer, at the Wonder Drug Factory, analysts were forever banging on about how the company just had to, had to break up. Outdated conglomerate model, holding everyone back. So much hotness waiting to be released. But Bayer hasn't been holding up too badly, either, and Bernard Munos has some things to say about both them and J&J.

It is not a good idea (to "undiversify") because, at the moment, we do not have good tools to mitigate risk in drug R&D, which is a problem at the macroeconomic level, because capital does not flow to this industry as it should. Too many investors have been burned too badly and are now investing elsewhere or sitting on the fence, so we need to somehow get better at that. . .we've got to live with the situation where risk in the pharmaceutical industry cannot really be mitigated adequately. You can do portfolio management. Every company has done portfolio management. It has failed miserably across the board. That was supposed to protect everybody against patent cliffs, and everybody has fallen down patent cliffs, so clearly portfolio management has not worked.

Mind you, "undiversifying" is exactly what Pfizer is trying right now. They're not only trying to undo some of the gigantism of all those mergers, they're shedding whatever they have that is Not Pharma. So they're running that experiment for us, as they have some others over the years. . .

Comments (14) + TrackBacks (0) | Category: Business and Markets


1. bob on March 27, 2014 1:26 PM writes...

Important to recognize that there are as many trends and whims in investment as there are in fashion (despite everything the analysts and management gurus say and X being The Way). Conglomeration works for J&J because for every drug they put out, they have the insurance policy of selling a gazillion quotidian things like saline bags to fill out their balance sheet in case it goes bad. That's great for long term stockholders but it can lead to creative lethargy because you don't really feel the wolves at your door. Conversely, unbundling can liberate groups of employees to do amazing things and expose them to more players in the market (thus unlocking value).

One model I always liked was what Cisco Systems (technology co) did in the 90s. They would spin out and fund (for one time) a research group as a startup, and give the employees options in the startup. When the startup succeeded, Cisco would buy them back, making the employees rich and getting a lock on some nice new technology. If it failed, it didn't cost them a lot.

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2. gippgig on March 27, 2014 1:37 PM writes...

Invest in a new IC chip and you can have it on the market in a year. Invest in a new drug and it will probably never make it to the market, and take 10 years even if it does. Where would you invest?

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3. steve on March 27, 2014 3:15 PM writes...

It seems more and more that they're investing in Universities. Nice way to get new drugs - don't have to spend on infrastructure, get lots of slave labor (oops, I mean grad students and post-docs) to do the work.

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4. Big Pharma calling on March 27, 2014 4:11 PM writes...

I was actually employed by one of the "other" companies during the period featured in the last chart. When I think of all I saw and went through during that time.... is there a drugs launched/patients helped version of these graphs to convince me it was worth it?

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5. metaphysician on March 27, 2014 4:39 PM writes...

OT, but I bet of interest:

Should we expect a new wave of anti-vax and other anti-medical paranoia?

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6. Morten G on March 28, 2014 9:32 AM writes...

@1. bob
Is there any empirical evidence that "wolves at your door" makes people more creative and productive?

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7. Anon on March 28, 2014 9:36 AM writes...

"we do not have good tools to mitigate risk in drug R&D"

Because you [collectively] laid off the good workers and have compensated the other portion of talent poorly enough they have left for greener pastures.

"Every company has done portfolio management. It has failed miserably across the board."
Again, it's a talent issue. Big pharma turned to layoffs = a worse pipeline for everyone. The risk is already collectively established, then the execs think trading will somehow mitigate this? It is just a shell game at that point and the only people benefiting are those charging transaction fees.

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8. simpl on March 28, 2014 10:20 AM writes...

Your examples are the big US Pharmas, which make them easier to compare: and even among these, you note that differences make things tricky. Just because J&J has a neat franchise in shoe polish does not mean that Pharmas should all have a shoe-polish division.
The European story, typified by Bayer, is that they have origins in the larger chemical industry. They have all had segments run dry, and each has rearranged differently to meet their challenges. Hoechst, for instance, has disappeared from the corporate universe, and been absorbed into Sanofi, Clariant, King, Celanese, and no doubt others. Bayer has kept its Pharma, OTC, material science and agrochemistry alive.
"Undiversifying" is about spreading risk. The other pole, focus, is about increasing margin, and, importantly, keeping critical mass. But note, each large redefinition has a cost to reorganise. Any attempt to remove old products to increase margins exposes producing plant to expensive changes, while removing the security of the high-volume, lower margin drugs. For accountants, that's no loss, as they are not counting the value of old product equipment, infrastructure, or personnel overlap, which includes shared research skills. External financial advisers also tend to miss such imponderables, which increases the risk of reorganisation.
Trying to pick the next big thing doesn't always work either. Here, I'd point to Lonza, a long-standing Swiss contract chemicals company, including drug substances and biologicals, who decided to produce generic drug products. They choked off their customers faster than they could generate sales, and have had to make a u-turn to survive.
For me, a business is like a sailboat, going with the wind, whatever direction or speed it provides. With each move of the rudder from one side to the other, you lose momentum until you catch the wind again, and ruddering doesn't make the boat go any faster.

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9. bob on March 28, 2014 12:04 PM writes...

@6: no..but to be clear, wolves at ones door is not meant to encourage a Romney-esque world view where you are one step away from destitution. I meant only that being in a small, agile environment where your actions make a real difference, for good and bad, to your company, tends to focus the mind.

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10. Anonymous on March 28, 2014 12:16 PM writes...

I would like to see these charts re-plotted with % of original value plotted on log y-scale.

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11. exchemist on March 28, 2014 7:47 PM writes...

What's your take on Novartis? Smarter/dumber. Meaner/nicer. Successful/not successful. Political/apolitical.

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12. Brian Orelli on March 31, 2014 2:05 AM writes...

FYI, Ycharts will do returns with dividends (and give you a nice embed code. Use "Total Return Price." Might have to use SPY for S&P500 to get the dividends.

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13. simpl @ exchemist on March 31, 2014 9:35 AM writes...

Novartis has done as well as the best pharmas since its formation in 1996. Like Bayer, they spun off divisions, notably dyestuffs, chamicals and Syngenta. Their portfolio management is still working well (nowhere near dead, anymore than double book-keeping is), throwing up a fair number of new products along the way, and growing especially in the cancer area. They have not had only successes after launch, either.
The share price has been comparable to the US firms, after the first growth years, but that is not as important as their improvements in volume growth or global diversification. On success, or luck: today the shares rose with LCZ696, last week there was bad luck with serelaxin; share price as a measure is too ephemeral for me.

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14. exchemist on March 31, 2014 1:57 PM writes...

Simple: thanks, man.

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