Business World

Thursday 22 February 2018

Share Watch: Why big pharma is such a tricky call for investors

Lilly 5-year share price
Lilly 5-year share price

John Lynch

Investing in any of the big pharmaceutical companies these days demands the wisdom of Solomon. The scale and pace of pharma mergers and acquisitions in the sector has been so hectic that punters cannot be sure if takeovers were replacing research and development.

There's been $850bn worth of takeovers in the last two years, and while best-selling products have lost their sparkle and their patent exclusivity, R&D departments haven't been able to fill the vital product pipelines fast enough.

Merger and acquisition activity has been seen as an answer. Indeed, the speed of this activity last year had one American regulatory lawyer, who worked on three mega-mergers, complaining that a firm for which she'd never worked had managed to lay her off, twice!

Amid all this, if I am going to pick a pharma company to analyse this week, I'd better make it one with old-fashioned virtues: such a company is Eli Lilly. The company spends enormous money on research ($5bn a year), employs 8,000 researchers, and develops life-saving drugs and products for humans (and animals) even if the process of drug discovery and approval can take up to 15 years.

Lilly was the first company to mass-produce penicillin and insulin. Today the company focuses on diabetes, including insulin, osteoporoses, schizophrenia, lung cancer, depressive disorders, and cardiovascular products.

The company has operations in 11 countries with major production facilities in the US, France, UK, Spain, Italy, China and of course Ireland, employing 39,000 people worldwide with a lofty $82bn market value.

The company also has an animal health business, operating as Elanco. This is 'big business' by any yardstick, worth $24bn globally per annum. It's a growing sector with product approval a lot faster than human drug approval.

Moreover it isn't dependent on blockbuster drugs. Elanco concentrates on drugs for livestock and domestic pets and contributes $2.4bn to group revenues. Recently Lilly completed a $5bn acquisition for Novartis animal health division and separated its animal health production from its traditional facilities.

To some observers this might be a signal that this division will be spun off. The company maintains it has no divestment plans, however.

Worldwide group revenue was $20bn last year. This was in spite of the loss of patent exclusivity particularly for two drugs with sales of $1bn each and was not helped by the strength of the dollar.

Investors were pleased that net income increased by more than 20pc to $3.6bn with earnings per share of $3.42. Total debt for the last four years has remained static at $8bn per annum. The share price today is $71, short of its all-time record of $92 mid last year and just above its yearly low of $70.

Most of Lilly's products are from its own laboratories but, like all pharma companies, it has a number of marketing arrangements and collaboration with the like of GSK, Merck, Boehringer, Bristol Meyers Squibb and Schonogi (Japan). While Lilly has not been part of the mega-merger mania mentioned earlier, there are other trends within the larger pharma sector that it can ill-afford to ignore.

For a start, US presidential candidate Hilary Clinton has brought drug pricing slap bang into the American political arena. Meanwhile, some drug-making companies, in preference to large deals, are shuffling assets to allow them to focus on areas of priority; swapping is clearly a cheaper and better option than paying the fees of investment bankers.

The French drug maker Sanofi is swapping its animal health care for Boehringer's consumer business. This could present problems for Lilly in the future. Novartis is swapping its vaccine business for GSK's cancer drugs.

Obviously drug companies are checking their portfolios, identifying assets that might be a better fit for a rival. Lilly is a solid company and its moves in the next year or so will warrant close attention.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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