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Impact investing


Joseph Mariathasan: Europe’s pharmaceutical and biotech industries

Europe’s pharmaceutical sector must find a way to emulate US biotech, Joseph Mariathasan writes

The European pharmaceutical industry is arguably the jewel in the crown of Europe’s industrial base, and GlaxoSmithKline (GSK) is one of the UK’s giants. It showed its strength last week when it filed its shingles vaccine Shingrix for US regulatory approval. Analysts estimate that the drug, one of GSK’s most promising experimental products, could generate revenues of $1bn (€909m) a year.

But Europe faces some significant long-term challenges if it wishes to retain its pre-eminence in healthcare. GSK may be an example of what could be the problem – it needs to revitalise a drug portfolio characterised by reliance on a few blockbusters now seeing falling sales, such as its inhaled lung treatment Advair. The US patent on this expired in 2010, so it is only a matter of time before generic versions destroy its revenues.

PwC estimates that almost half of all corporate research and development in the in UK in 2016 has been accounted for by the healthcare and pharmaceutical industry. Clearly, the sector has immense strengths, but the problem is that virtually all of that figure is accounted for by just two companies – GSK and AstraZeneca. Europe has not seen the plethora of small and mid-sized spinoffs and start-ups that characterise the US healthcare market.

Are Europe’s large pharma companies thematically too diversified? Are there opportunities to invest in smaller companies emulating the US market? The fact 85-90% of one of Europe’s largest healthcare funds is invested in the US suggests Europe faces some significant long-term challenges if it wishes to retain its pre-eminence in healthcare. The manager prefers small and mid-sized companies as new investment ideas that have a clear world-class expertise and a focus on specific areas, which he holds for upwards of five years. He sees Europe’s large pharma companies as solid, good companies but argues that they are thematically too diversified, or even run as healthcare conglomerates.

Europe does not see the plethora of small and mid-sized spinoffs and start-ups that are seen in the US, but the US is not its only rival. China and India have well-established pharmaceutical industries, and, with an abundance of brainpower, they are well positioned to produce streams of cutting-edge healthcare companies.

Europe’s healthcare industry can be divided into three segments, with a handful of giants – the UK’s GSK, the British-Swedish AstraZeneca, the Swiss Novartis and Roche, France’s Sanofi, Danish diabetes specialist Novo Nordisk and possibly the German company Fresenius. Beneath the pharma giants is a set of mid-sized companies that, for historical reasons, are owned by foundations or families, such as the Danish company Lundbeck, the French company Ipsen, the Spanish companies Rovi and Almirall and the Italian company Recordati. Beneath this are hundreds of emerging biotech companies – some very tiny and others of reasonable size. But the biotech industry is very much weighted towards the US, versus Europe. There are many reasons for this, including the availability of risk capital.

Pharma is still perceived as being a safer-haven, low-volatility sector. Over the long term, it would generate lower returns than biotech but outperform the broader market. Biotech is still perceived as an innovation industry that is more volatile. But the US companies such as Celgene are producing double-digit revenue growth rates with very high sustainable profit margins. For Europe as a whole though, the issue may not be purely one of generating short-term investment returns. If the jewel in its crown is not to be tarnished over the long term, Europe’s pharmaceutical sector must find a way to emulate the success of the biotech companies in the US.

Joseph Mariathasan is a contributing editor at IPE

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