Returns on Pharma R&D have been disappointing: From 2000-2009,
US and European large cap companies have spent half a trillion dollars,
but 2010E sales of products launched since 2005 are just $4bn, or 6% of
2010E sales.
• The Remedy: Cutting in-house R&D and externalise it is unlikely to fix
the problem. The remedy, in our view, is increased appetite for risk, with
rigorous focus on unmet need that needs to be complemented by
aggressive licensing to diversify risk. Roche and Novartis have been early
movers on both dimensions.
• Pipeline assets are largely free: 100% of European pharma share prices
can be attributed to marketed products - not because pipelines are empty
but because investors attribute little value to late stage pipeline assets, as
innovative approaches are heavily discounted and in-licensed assets
remain under-analysed. Data from our investor survey supports this view.
Realistically, upside to share prices from cuts to R&D from here seems
limited, therefore investment focus should move on to upside from
better than expected R&D output.
• What if the market is wrong on R&D output? In this report we
highlight 9 un-appreciated mega-blockbuster candidates with data from
2011-2014 that fulfill 3 criteria: (1) address substantial unmet medical
need (2) could substantially impact company valuation and (3) not
reflected in forecasts and valuation. The NPV of those 9 blockbusters
exceeds $100bn, providing 25% upside to the market cap of European
pharma companies.
• Potential Winners: We calculate that Roche has 41% upside from 3
mega-blockbuster candidates (dalcetrapib, aleglitazar, RG1678). GSK has
16-25% upside from 3 high potential assets (darapladib, otelixizumab, next
generation COPD drugs). Aside from Novartis’ COPD programme (9%
upside), Novartis seems to rely more on the breadth of its portfolio, rather
than mega-blockbusters. Programs that made the cut in the midcap space
include Ipsen’s sulphatase inhibitor oristusane (37% upside), and Bayer’s
riociguat (22% upside).
• Therapeutic Focus: We provide an in depth analysis on the most
promising, underappreciated development activities in CV, respiratory,
auto-immune diseases, CNS and oncology.

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