Still Waiting For Pharma’s Personalized Medicine Share Price Bounce! - Diaceutics

Still Waiting For Pharma’s Personalized Medicine Share Price Bounce!

April 12th, 2013

Philip White

This industry’s share price landscape has lost a little of its shine, but Philip White of Diaceutics looks at the financial road ahead and how, from a broader enabling perspective, personalized medicine can address the value challenge for pharma.

The global pharmaceutical industry has been undergoing a period of dramatic restructuring over recent years [2013] due to patent expiry, lack of new products, world credit recession, mergers and acquisition activity and rationalization. The current challenges are global in nature; both exogenous and endogenous factors have in the past weighed on the industry and against a backdrop of a severe global credit recession. This industry’s share price landscape has lost a little of its shine but, from a broader enabling perspective, personalized medicine can address the value challenge for pharma.

Pharma financially under fire

One of the major causes of share price gloom is that many of the industry’s most lucrative blockbuster drugs are coming off patent. According to a recent Bloomberg report of 104 drugs with US patent protection expiring between 2012 and 2016, 44 per cent will lose exclusivity this year and next. Drug makers last year lost patent protection on products valued at $34 billion in annual sales, an amount that will rise to $147 billion by 2015, according to Bloomberg.

Individual pharma companies have adopted different approaches to mitigate revenue losses due to the patent cliff. An important point to note is that large pharma traditionally have healthy profits and large cash balances. With these large cash balances come strategic options and time to adapt to the changing markets. Casualties may exist during this market change, however they will most likely be the smaller capital pharma companies. Recently K-V Pharmaceutical Co. (KV/A), a provider of women’s health care products, filed for bankruptcy in the US.

Have the dark clouds passed?

Pharma stocks have been somewhat under-priced to date as uncertainty in the form of R&D drug failures, restructuring and a fall in sales due to the patent expiry of key blockbuster drugs. Recently, however, investors have rewarded companies that have diversified to de-risk future income streams, such as into consumer and animal health, medical devices or even generic drugs. Examples include GSK, Johnson & Johnson, and Sanofi. Novartis diversified further in May 2012 with the $1.5 billion purchase of Fougera, a dermatology generics company.

Stock markets have seen a welcome share price hike during Q1 2013, sending global equities towards multi year highs and the Dow Jones Industrial Average to  new records. This growth is being led by the health care sector as a whole which is up some 11 per cent in 2013 year to date. It has been 15 years since health care has led the S&P500 like the gains seen this year.

So what has happened?  Firstly, pharma results, with the exception of one or two companies, have been good, despite the known uncertainty. It appears investors see the industry as having overcome the patent cliff.

Has personalized medicine contributed to this bounce?  

For some companies the answer to this is clearly yes. To quote Roche CEO, “PM is the basis for our success today and in the future as well.” Roche share price is up some 31 per cent on last year. However, for the majority of companies personalized medicine still features too far down their investor presentations and lacks any clear financial articulation by CFOs in the industry to have contributed to current share prices. Having said that, we recognize that the industry believes personalized medicine is the way forward in health care but factors such as test information, patient confidentially, IT infrastructure and the economic case for higher priced drugs serving a proportion of the population have been a constant headwind preventing the rapid growth that many commentators predicted. Company financial presentations have started to incorporate the personalized medicine message, positioning it as a business enabler but in truth the financial message is opaque. Our discussions with senior analysts and financial press would support this.

What effect will personalized medicine have as a growth opportunity for pharma over the next three years?

Speed in regulatory approval and the increasing progress in the area of science and technology to identify sub groups has clearly advanced pharma activity in the personalized medicine space, potentially providing a compelling financial case for pharma’s investors.

Specifically, personalized medicine will affect share price and PE multiples, as its benefits lie in re-engineering of the fundamental financial cornerstones of the pharma business model. For example, personalized medicine directly impacts development cost reduction, speed to market and improved clinical efficacy claims. As such, the growth in the personalized medicine market represents another de-risking strategy for pharma. Having said that, we need to accept that the shift from mass market ‘blockbuster’ drugs to ‘niche-busters’ has been slow. Currently, personalized medicine drugs make up only 4 to 6 per cent of pharma sales revenue. Personalized medicine investments to date will largely be unaffected by pharma restructuring and may benefit as pharma looks to secure a portfolio of efficient drug development albeit for a smaller number of patients. Our analysis suggest that the market for personalized medicine will reach 20 per cent of overall therapy sales within five years.

From a broader enabling perspective, personalized medicine can address the value challenge for pharma by addressing the investors’ risk (development failures, litigation, regulation requirements, clinical superiority) and exploiting opportunities from scientific developments, shorter development time, lower development cost, higher probability of success and better use of resources.  As CFOs learn how to convert all of these benefits into financial statements based on overall business model improvement, we will likely see a two-tier investment market with those that adapt to personalized medicine streaming ahead of those who don’t.


The health care industry, following several years of depressed share price, has now seen a dramatic resurgence for the sector. Analysts now believe the patent cliff is behind the industry and they look to 2014 forecasts which present good returns for the industry as a whole in competition with other global industries. Personalized medicine will evolve into all areas of medicine in the future at a steady pace and although this may require slightly longer term investment we see progress being made through large collaboration funds, government agencies and pharma companies. Personalized medicine will become part of the pharma-forecasted strategies as we move forward.

If the recent gain in the health care market is anything like the 1998 gain when it led the market in Q1 and ended up finishing the year 42 per cent up, this will have a positive impact on the industry and its employees through easier finance, increase in the value of share options, etc., and will allow for a proportion of longer term investment in personalized medicine.

Because of an initial articulation of the personalized medicine benefits, analysts now understand its role in the landscape of the future health care model (if not yet the direct enterprise impact on pharma). This will also continue sending positive messages back down the drug pipelines and further perpetuate the growth in personalized medicine. Finally we look forward to the CFO investor presentation which can articulate the following share price benefits:

Faux Investor presentation

  • Our investment of $XX in personalized medicine across the company will contribute to yy% of our future growth; ZZ% of our pipeline is devoted to personalized medicine therapies
  • Personalized medicine has reduced our corporate risk by;
    • Improving the clinical efficacy of therapy A and therapy B versus an all-comers approach
    • Shaving xx months off the development time due to accelerated trials and approval
    • Accelerating time-to-peak sales for therapy C due to our smart investments in enabling the underlying diagnostic market for this therapy

Please reach out to us at Diaceutics if you need any help in quantifying the above metrics.

My thanks to Andrew Jackson at the Financial Times and the European Alliance for Personalized Medicine for their contributions to this Expert Insight.


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