Big Pharma growth malady has a risky cure
XLV•Big Pharma’s traditional model is under pressure
The Big Pharma playbook is relatively simple: invest heavily to develop new blockbuster drugs, and top up your pipeline by buying other drugmakers and smaller biotech groups. The aim is to replace the top selling medicines before patents expire and sales plunge. The latter is likely to be a big problem with drugs generating some $400 billion of revenue coming off patent by 2033. Yet the strategy is now under pressure on multiple fronts.
In-house drug development is becoming less efficient
The snag is that the alternative, developing drugs in-house, is becoming an increasingly inefficient use of capital. It's always been hard: one rule of thumb is that one in every 10 drug fails. And, while recent years have seen blockbusters like Novo Nordisk's weight-loss treatment Wegovy, or AstraZeneca’s breast cancer medication Enhertu, the likely returns on investment are falling. Berenberg analysts expect drugmakers to generate an annualised 9% return on their 2026 late-stage drug pipelines, down from an average of 11% over the 2016 to 2024 period. At that rate, the sector will only just be covering its 8% cost of capital, with Sanofi, Novartis and Bristol Myers Squibb all falling below that threshold. There are many reasons to think returns may get thinner, including US President Donald Trump's move to slash drug prices, or the growing competition from Chinese pharma groups. On Monday, Novo Nordisk's shares fell 8% after it tried to reassure investors with details of its future pipeline to offset the loss of exclusivity on Wegovy.
