Pump Up the (Early-Stage) Pipeline
Many companies these days face a real challenge in communicating their value to potential investors: They can't tell investors the story they want to hear, and they don't quite know how to tell the story investors need to hear.
What investors want to hear, of course, is that the late-stage pipeline is filled with high-value (and easy-to-evaluate) new products. Today, not many companies can boast that. There are exceptions—but throughout the industry, on average, there aren't enough products in the late-stage pipeline to even make up for the revenue lost to patent expirations.
The good news is that multiple opportunities exist for companies to play a more proactive role in shaping investor expectations.
We polled several dozen equity-research analysts and buy-side investors to identify those investor-relations activities that
would have the biggest impact in helping value a company's pipeline. They identified the following three strategies as key:
Companies that follow these strategies will achieve a fair assessment of their late-stage pipelines, with a greater likelihood that promising Phase II assets—particularly those that are likely to be on the market within a five-year horizon—would be appropriately reflected in their valuations.
Step 1: Keep the Channels of Communication Open
Frequent and focused communication is essential for any strategy aimed at deriving fair credit for pipeline products. Given the breadth of a company's pipeline and the sheer number of mid- to late-stage offerings, investors need guidance around key assets and the related market opportunities. Companies should consider hosting more R&D days as a venue to showcase products to investors and to keep them up-to-date on important development milestones. When such events are held too infrequently, investors are often overwhelmed by large volumes of data and don't have adequate time to obtain the appropriate level of detail, in effect forcing them to select only a subset of products to focus on. R&D days should be held once a year at a minimum (potentially twice a year for companies with very large pipelines).
For companies with sufficiently diverse mid-stage pipelines, holding events focused on therapeutic areas would provide a way of highlighting a manageable subset of products. Novartis was cited by analysts as a prominent example of a company that does this well. For instance, during the annual meeting of the American Society of Clinical Oncology (ASCO), Novartis hosts an oncology-focused investor event in which data from studies sponsored by the company are presented. Such events inform investors of progress related to key products and frame this progress in the context of Novartis's overall oncology pipeline.
By having the R&D therapeutic-area heads and clinical specialists available to lend additional insight at these events, more sophisticated investors can engage directly with the key managers who are closest to the products. These activities allay concerns and answer questions investors may have on data presented. They also serve to create excitement around important pipeline products and demonstrate the willingness of senior management to be more open with the investment community.
Step 2: Demystify the Pipeline
This fear is unfounded. There are plenty of opportunities to increase transparency into key products without disclosing insight to competitors. Investors point out that mid- and late-stage products enjoy a substantial head start over any would-be "me too" products. Plus, the information that investors seek is unlikely to endanger a company's competitive position.
For example, for mid-stage products, the most sought-after information can be as basic as mechanism of action, addressable market, and progress against clinical-development timelines and major milestones. This information is important to investors for framing the opportunity associated with these products, particularly for those with a novel mechanism of action or those pursuing specialty indications.
Merck, in particular, earned praise from analysts for charting the progress of all pipeline products—including those that are early- and mid-stage—through the company's Web site, boosting investor confidence in the company's ability to move products through the trials.
For late-stage products, the key information investors seek directly informs valuation-model parameters and includes market size and dynamics, product differentiation, and projected launch timing.
By communicating confidence in the ability to realize this potential both in the short term and beyond the typical five-year forecast window, companies can directly increase the likelihood that Phase II products will be included in their valuations and that the commercial prospects of Phase III products will be reflected accurately in sales projections. Companies that do this well will be making as strong a case for future growth as possible, supporting higher price and earnings multiples.
Step 3: Create a One-Stop Shop
Investors turn first to the company to provide baseline input for their investment thesis, but they typically are forced to turn elsewhere to fill critical information gaps. A company that can provide a true one-stop shop for publicly available information, say through a Web site, would save investors time in aggregating this information from numerous sources and would ensure that the information was reliable. This is particularly crucial when disruptive events occur and perceived secrecy around the details can be cast negatively.
Companies can also use this opportunity to make sure that the information they provide is appropriately framed, with a balance of internal R&D and finance perspectives. They can provide their perspectives on key drivers of commercial potential for existing therapeutic areas and proactively shape expectations in new markets by clarifying what they think of the competitive landscape and how they intend to position themselves within this landscape.
With these strategies in hand, pharmaceutical companies can meet the challenge of communicating an investment thesis in an era in which the historical blockbuster template is evolving and recognition among investors that pipeline value may be distributed across a diversified R&D portfolio has increased. This type of pipeline migration makes effective communication of R&D information more difficult but, as analysts point out, critical for success.
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