A new year fosters
hope and optimism. In 2009, all Pharma companies, Investors and Regulatory
authorities will need wisdom and prudence to bring in cheer. With this
backdrop, we have taken a fresh approach in the presentation of our
annual Global Pharmaceutical and Biotechnology Outlook (TM) 2009. After
defining the key determinants of growth within each sector, we recommend an
Overweight position in Rising Stars (RS, unprofitable companies).
RISING STARS
Our rationale for
recommending that investors be Overweight in the RS sector (as
per Recommended Portfolio in Executive Summary Outlook ‘09) is based on a
holistic and comprehensive analysis of the BioPharma industry in the US,
Europe, Japan, and Emerging Markets over the last decade, coupled with revenue
projections for this universe through 2016. Almost all Global pharma companies
will have to address the rapid top-line decline driven by patent expiries (without
much in their pipeline to make up for this erosion), increasing therapeutic
substitution and voluntary or Government-ordered price cuts. Perhaps for the
first time ever, consumers in the US (and likely elsewhere), are avoiding
filling prescriptions due to the current economic turmoil, and questioning the
safe haven status of the BioPharma sector (despite modest outperformance in
recent weeks). We discuss these trends in our report on the Global US and EU
sub-sector.
Global pharma should
have externalized its R&D efforts aggressively from 2005, when its R&D
outlook started deteriorating. However, the current stock market crisis offers
an opportunity to acquire promising pipelines of RS companies, now trading at
attractive valuations.
RS company managements
focus mostly on innovations that can bring about novel products and are usually
funded by angel investors, Venture Capitalists (VC), Private Equity investors,
and the public following an IPO. The investors are using a broad brush for all
innovators, applying a historical barometer and law-of-average method to
evaluate these firms. It has become imperative for a RS to seek better avenues
for their funding from sources which “values its efforts,” Global Pharma or
Mature Biotech companies fully understand the value of innovation, and hence
are the most “suitable partners.”The liquidity crunch on the street does not
justify discounting value of innovations as many late stage products are
necessary to fulfill the pressing needs of doctors and patients.
A symbiotic
partnership model is emerging as many of the large companies find the “string
of pearls” approach an efficient way to rebuild a balanced pipeline by joining
hands with a number of RS companies. Those RS companies with a late
stage product and sound proof of concept have an upper hand in bargaining, as
good products are even more scarce than cash. Cash-rich, pipeline-poor
Japanese companies have confirmed this trend, as illustrated by the substantial
premiums paid by Takeda, Eisai and Shionogi recently.
The current economic
environment once again forces us to remember the two key points while investing
in the RS sector:
1. Major corrections
in valuation have proven to be an excellent entry point.
2. Among the hundreds
of “Fallen Angels” lie a handful of promising RS companies.
Prudence justifies
that long-term investors focus on certain criteria that surface a select group
of companies with a POC (proof-of-concept) at hand or just around the corner.
In our Macro thesis report in RS, we have selected 41 RS companies and train
our focus on the 14 Opportunities. Macro matrices based on the
following parameters frame the debate for these companies.
1. Ability to develop
a drug for an Unmet Need – ie: Vaccines, Genetic diseases ,
etc.
2. A First in
Class or Best in Class compound.
3. Partnership
with a large company for at least one of its compounds that validates
the promise, while reducing risk.
4. Cash for at
least 18 months to sustain burn/investments in PhII and PhIII clinical
development of own pipeline.
5. Innovative
and Proprietary Cutting Edge Technology and/or discovery
platform.
6. Track
record to bring a compound from the Bench to Proof of
Concept stage and (in a handful of circumstances) to the
market place.
Based on this we
expect our Rising Star top picks, BioMS, Intercell, Intermune, LifeCycle
Pharma, Myriad Genetics, and NicOx are to become tomorrow’s “Shining Stars” or
Mature Biotechs.