Big Pharma transforming into bigger biotech companiesBarrons - June 17, 2022 - "When GlaxoSmithKline spins off its enormous division selling drugstore staples like Advil and Tums next month, it will represent more than just the latest shuffling of assets among corporate giants. It will mark what is effectively the end of GlaxoSmithKline, diversified pharma conglomerate, and the birth of GSK, The transformation of the United Kingdom–based GSK is the culmination of a decadeslong process that’s turned virtually all of the world’s largest pharmaceutical companies into bigger versions of biotechnology companies like Amgen (AMGN) and Gilead Sciences (GILD), which sell high-priced, complex medicines, often for rare conditions. It’s a shift investors have demanded—and the science has, too, drug executives say. But by taking away stable revenue streams that cushioned the ups and downs of the drug-discovery business, it could turn Big Pharma stocks from buy-and-stuff-under-the-mattress blue chips into riskier bets. At the same time, it may reinforce the long-term shift that has pulled Big Pharma’s focus toward expensive, specialized treatments and away from drugs for the most common causes of death in the U.S., such as heart disease and diabetes.
“Investors [have been] pushing companies to move in that direction, because they’re looking at the market now,” says Kenneth Kaitin, a professor at Tufts University School of Medicine and former director of the Tufts Center for the Study of Drug Development. “And they’re seeing that some of these drugs to treat rare diseases and rare cancers have very high price tags.” Big Pharma firms have been dumping sideline businesses for years. Pfizer (PFE) sold a chewing-gum division in 2002; Bristol Myers Squibb (BMY) spun off its infantformula unit in 2009; Eli Lilly (LLY) spun off its animal health division in 2018. Next year, Johnson & Johnson (JNJ) plans to spin off its giant consumer health division, which sells Tylenol and Band-Aids.
Not every Big Pharma company will be a pure-play biopharma: Merck (MRK) will still have an animal health division, Roche Holding (RHHBY) will retain a diagnostics division, and even Johnson & Johnson will still have a medical-devices unit. But the majority of their peers, including Pfizer, Lilly, AbbVie (ABBV), Novo Nordisk (NVO), AstraZeneca (AZN), and Bristol Myers, will make new drugs and sell new drugs—and that’s it.
In fact, the pure-play biopharma approach hasn’t always worked so well for large-cap biotechs themselves. Despite developing important medicines, the big biotechs have a mixed record when it comes to their ability to survive after the exclusivity periods on their top products expire. For every Amgen, which has built a broad, sustainable portfolio, there are companies like Celgene and Alexion Pharmaceuticals that sold out to Big Pharma when faced with major patent cliffs.
Dissatisfied with the limits of the diversified conglomerate, investors have pushed the pharmaceutical firms toward more-focused models. “The general thesis, from the investor side, is if I want to invest in an animal health company, I can invest in an animal health company,” says Vamil Divan, an analyst at Mizuho.
One important proof point was the 2013 deal in which Abbott Laboratories (ABT), a diversified company with infant-formula, diagnostics, and medical-devices divisions, spun off its branded pharmaceutical arm as AbbVie, a pure-play biopharma that sells the arthritis drug Humira, one of the bestselling pharmaceuticals in history. AbbVie pays a hefty dividend; its shares, including dividends, have returned about 500% since the spinoff, over a period in which the S&P 500 has returned about 220%.
Pfizer shares seem likely to climb. The stock is trading at a valuation that seems to underestimate the durability of its Covid-19 vaccine and therapeutic franchises, and to give too little credit to the abilities of Pfizer’s research and business development arms to surmount coming patent cliffs.
https://www.barrons.com/articles/big-pharma-biotech-stocks-51655417765