Three key things investors should look for when investing in biotechs
Health & Biotech
Health & Biotech
Pharma stocks globally have underperformed major indices over the past three years — but the best-run companies are following three key tactics, say experts from management consultancy Bain & Company.
“Escalating pricing pressure, fierce competition and higher innovation hurdles have dramatically changed the playing field” for drug developers, reports Bain in new research.
Key issues facing the industry include:
— A halving in the average period of exclusivity for a new drug to only four years
— Higher costs
— Flat productivity growth, averaging 1.2 per cent over the past ten years at top pharma companies
“Traditional pharma strategies no longer deliver the growth that investors and other stakeholders are expecting,” says Bain.
Bain recently studied a number of drug stocks that were outpacing the industry and found they had three things in common: category leadership in a few product areas, customer-focus and lean operations.
“Combining all three has the most powerful impact on growth and value creation,” the management consultancy found.
Focus leads to better brand recognition, deeper clinical expertise and more relevant products. Category leaders “deliver better average returns because they have more successful launches, produce higher peak sales and reach those peaks faster than rivals”, Bain says.
For investors, this means avoiding drug stocks with diverse portfolios and looking for the ones that are quick to divest under-performing “follower businesses” that drag down shareholder returns.
“Over 10 years, companies with high portfolio focus generate median shareholder returns of 11.2 per cent compared with 7.5 per cent for companies with low portfolio focus.”
Only half of the success of the typical pharma is determined by product features or clinical profile, says Bain. The other half is related to how a company serves customer needs.
Investors should look for biotechs that are focused on “identifying the solutions that customers value most”.
These stocks are less likely to spend money promoting products to doctors — and more likely to invest in new capabilities such as digital tools and collecting real-world patient data.
“Companies that excel at managing the customer experience and building customer advocacy can increase their market capitalisation by 25 per cent or more,” says Bain.
Lean operating model
Biotechs are not very efficient in administration and typically have more management layers than other industries, says Bain.
Average costs as a per cent of revenue are an astounding 40 per cent higher than in other industries.
Investors should look out for biotech stocks that take on bold redesigns in cost reduction rather than incremental improvement.
“Pharma companies that embrace significant structural and behavioural change can produce a five-to-ten-point margin improvement without affecting underlying business performance,” Bain says.