Standard Life Investments

Through the Lens

Stayin' Alive - Global Equities

  • Drug companies using R&D spend pragmatically
  • Changes to the FDA’s approval procedures
  • Finding growth stories among the multi-billion dollar drugs industry

In 2013, the Food and Drug Administration (FDA) approved 27 new drugs compared to 39 the previous year (the greatest number of approvals since 1997).  This resulted in some scaremongering articles about the success rate of what is a multi-billion dollar industry. However, the landscape is changing largely as result of drug companies becoming smarter with their R&D expenditure. More products are emerging from the pipeline that are differentiated, the days of the ‘me too’ product are falling by the wayside. Companies are becoming much more discerning during the development stage and abandoning products that are unlikely to make the grade. That said, a reduction in approvals does not necessarily result in a revenue reduction, as revenues from approved drugs in 2013 still exceeded projections

A change in the FDA’s approach has also helped to drive change in the industry. The introduction of the Breakthrough Therapy Designation (BTD) aims to speed drugs to market that treat serious or life-threatening conditions and where preliminary evidence suggests that the drug will work better than existing treatments. The FDA responds to all BTD requests within 60 days and earlier this year had granted BTD status to 37 compounds. The fact that a number of the ‘me-too’ drugs are falling off the radar is being welcomed by investors, given that the spend on R&D is more likely to result in ultimate approval.

Roche, which has received the coveted BTD for its PD-L1 cancer treatment, has been moving faster than its competitors, while receiving less industry coverage of its developments. This means that pipeline developments are not in the price. Similarly, Amgen has a number of pipeline products that are not reflected in its valuation given that most of the coverage has been on its blood cancer drug Kyprolis, which failed one of its clinical trials in August. Many investors have focused on the potential for sales growth from Kyprolis to 2020, whereas we are more compelled by the potential of its smaller drugs over the next couple of years.  We anticipate Amgen’s yield will continue to improve and the share price will receive meaningful impact from its pipeline drugs.

The macro R&D environment is not without challenges but often investors are tolerant of the high-risk nature of developing such products. We believe this creates opportunities for the astute stock-picker.

To listen to the current views of Mikhail Zverev, manager of the Global Equities Fund, please register for our next webcast here.