Valuing Pharmaceutical Companies

Citation

MacInnes, A. (2001), "Valuing Pharmaceutical Companies", European Business Review, Vol. 13 No. 2, pp. 125-126. https://doi.org/10.1108/ebr.2001.13.2.125.1

Dynamic and profitable, the pharmaceutical industry offers the global investment community some of the most exciting financial and business opportunities available today. The sector’s growth rate is attractive and shares are popular in investment portfolios, but there can be a high element of risk if companies fail to launch products in their pipeline.

The pharmaceutical sector, which has a global market capitalisation of about $1,150 billion (ranked only behind banks and telecommunications), is undergoing a period of dramatic change. Technological developments like the much‐heralded sequencing of the human genome are paving the way for new product development. At the same time, particularly in Europe, governments are tightening their purse strings. The consequent pressure on manufacturers to reduce prices has resulted in lower revenues.

Following a succession of mergers and acquisitions, consolidated multinationals now dominate the international scene, competing alongside specialist start‐up biotechnology firms. All are driven by innovation as they race to develop and market new treatments for disease.

Valuing Pharmaceutical Companies looks at ways to assess the worth of these players. At first glance, this may seem a tall task in a fiercely competitive sector where no one single firm has more than 7.5 per cent of the global market and where companies operate in an intricate regulatory environment. But by brushing aside complex investment theories, this book provides the essential tools to value companies in terms of scientific development, competitive challenges and the environment in which they operate.

Writing for a wide audience – from corporate financiers and equity investors to pharmaceutical company employees and business students – the authors take pains to lead the reader through the quagmire in clear and concise stages. Without becoming bogged down in irrelevancies, this practical guide looks first at the structure of the industry and then at issues to consider when evaluating pharmaceutical equities. A well‐researched reference section, including a number of pertinent website addresses, and comprehensive bibliography provide further sources of information.

Interestingly, the authors stress the importance of taking a long‐term view when valuing pharmaceutical firms. Even if a company has a strong product pipeline and good growth prospects, a change in market circumstances can dramatically alter its prospects unless it has been able to factor in the effects of the change and act accordingly.

One such long‐term consideration is industry consolidation. Mergers and acquisitions have forced European companies in particular into the middle section of the industry. Or their ranking has been pushed down because they simply run out of steam – perhaps their best‐selling product has lost its patent protection, leaving a gap in the flow of products. They too then decide to merge in order to better compete at an international level. And so the cycle continues.

Another long‐term consideration is the prospects for a company’s major products, both on the market and in development. Although long‐term growth in drug sales means the sector is relatively unaffected by economic cycles, individual products have their own life cycles, so it is necessary to examine which are growing and which are in maturity or decline. Also important is the potential for products still in the pipeline, particularly in the case of biotech firms because their value is determined by the likelihood of success of their early‐stage products rather than by revenues or earnings, as is the case with the established majors.

It will be especially interesting to monitor future valuations of biotech companies in light of advances in the human genome project. Armed with this guide, I shall be following them closely.