![]() How underlying fundamentals explain biotech performanceīiopharma’s outperformance of the broader market in the past two decades and its acceleration over the past five years have been driven by delivering innovative treatments and scientific breakthroughs in the industry’s pipeline. Similar to the medium-biotech group, we expect this group could contain some of the front-runners of the next decade. The vast majority of biotechs-around 160 from our list of approximately 240 publicly traded biotech companies for which TRS data is available for the past five years-are small and not currently profitable. This change in expectations has likely been driven by investors’ perception that this group could include some of the leaders of the next decade. For these largest biotech companies, the valuation multiple has declined slightly, signaling an expectation that future performance will moderate given the size these companies have reached and given that further sales growth and margin expansion become harder for companies of this scale.įor the next tier, medium biotechs with sales of $100 million to $1 billion, TRS results have mainly been driven by a change in expectations, given that, as a group, they did not outgrow the overall biopharma market (13 percent sales growth) and their margins have remained low or even declined. They’ve also been able to expand margins (Exhibit 2). These three mega biotech companies, each with revenue of more than $10 billion, have delivered outsize returns of 23 percent from 2012-2016, mainly driven by consistent double-digit growth. However, performance is skewed by a small number of very successful companies-a disproportionate amount of the performance was due to the largest revenue-generating biotech players (Amgen, Biogen, and Gilead), which delivered breakthrough therapies in the past decade. ![]() The R&D investment in prior decades started to pay off, with margins more than doubling-to 36 percent, from 17 percent-to overtake large pharma margins. In aggregate, public biotech companies grew tremendously in the decade since 2005, with revenue expanding to $141 billion, from $62 billion. What drives biopharma company performance? In the past two decades, the biopharma industry has created almost $1.7 trillion in shareholder value in excess of S&P 500 performance ($1 trillion from pharma and $0.7 trillion from biotech), much of this in the past ten years. While this multiple is still high, it is in line with historical valuation levels and consistent with what one would expect if biopharma could continue to deliver on mid-single-digit sales growth while maintaining current margins (around 30 percent). ) of 20 times at the end of 2015 but subsided to 17 times by the end of 2016. The EV/EBITA multiple is the ratio of enterprise value to earnings before interest, taxes, and amortization. This was mainly due to a change in expectations, which had grown to an unprecedented enterprise multiple (EV/EBITA 1 1. That said, in 2016 a correction of the outperformance took place (there was a 14 percent decrease in 2016). ![]() And there’s been a significant run-up in value since 2011, driven by biotech TRS of 28 percent CAGR for the period 2011 to 2015 (Exhibit 1). Over the past 20 years, biopharma has outperformed the S&P 500 index-delivering indexed total returns to shareholders (TRS) compound annual growth rate (CAGR) of 12 percent for biotech and 9 percent for pharma.
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