Pharma stocks—strong price performance
In the first three quarters of 2013, the S&P 500 did well, increasing by 15 percent, while the FTSE Euro Top 100 increased
by 7 percent. The pharma industry did slightly better, the Y&P US Pharma index increasing by 18.9 percent over that same time
period, while the Y&P European Pharma index rose by 12.4 percent, and the Y&P Generic index by 30.1 percent.
Valuations have also increased significantly, with the most dramatic increases occurring in the ethical pharma sector. The
Y&P US Pharma index P/E ratio increased from 18.6x at the end of 2012 to 23.5x at the end of the third quarter of 2013. The
Y&P European Pharma index increased similarly from 15.1x to 21.4 x over that same time period.
The Y&P Generic index increase was less impressive, increasing by a small amount from 22.9x to 23.6x over the same time period.
This was partly driven by earnings increases.
These multiples have improved, but they are still dramatically down from where they were just a number of years ago, when
the pharma industry was viewed very differently. The pharma industry was once viewed as a stable, profitable, high growth
industry. The industry is now viewed as far less stable with industry uncertainties everywhere and predictable, profitable
growth a distant memory.
The significant turnaround this year has been welcomed by investors and the industry.
We will see even more positive changes when the industry regains its footing, which depends in turn on when the market has
confidence in the industry's structural stability going forward.
Still no mega deals
In the first three quarters of 2013, 29 deals were completed worth $11.6 billion versus 38 deals completed, worth $30.9 billion,
during all of 2012.
This represents a significant slowdown in dollar activity, but a similar pace in terms of the numbers of deals completed,
bolstered by a surge in Asia. The one deal above $1 billion in value was the acquisition of Bausch & Lomb by Valeant for $4.6
billion. The next largest deal was only $879 million; the acquisition of Guangzhou Baiyunshan Pharma by Guangzhou Pharma.
In comparison, there were five deals valued at over $1 billion (equity value) in 2012, primarily strategic deals: Couckinvest
NV's acquisition of Omega Pharma NV for $1 billion, Sandoz's acquisition of Fougera for $1.5 billion, TPG Capital's acquisition
of Par Pharmaceutical for $1.9 billion, GlaxoSmithKline's acquisition of Human Genome Sciences for $2.8 billion and Bristol
Myers Squibb's acquisition of Amylin Pharmaceutical for $5.1 billion.
However, there are signs that the pace is picking up. As of September 30, 2013, the value of the deals announced but not closed
was $29.9 billion (17 deals), the largest of which is Amgen's acquisition of Onyx.
Pharma debt and equity financing—limited, but readily available
Pharma companies have generally been perceived as strong cash flow generators, so investors have, thus far, felt comfortable
lending to the industry in their pursuit of yield. Borrowing levels have been more a function of the issuers' needs.
In the first three quarters of 2013, non-bank debt issuance was $25.4 billion compared to $50.9 billion for all of 2012, a
significant decrease in activity. This is directly related to a slowdown in M&A activity and the related financing that would
have been required.
Equity issuance in the first three quarters of 2013 showed a meaningful increase on a very small base, with $4.6 billion of
equity issued compared to just $3.5 billion for all of last year. There were three IPOs in the first three quarters of 2013.
Although the equity issuance activity has been modest, it has not been due to a weak overall IPO market since the IPO market
for life sciences has been strong this year. Instead, it is because Pharma's need for public equity capital has generally