Beware the Thundering Pharma Herd

January 8, 2014 Leave a comment

Beware the Thundering Pharma Herd

HELEN THOMAS

Jan. 5, 2014 5:21 p.m. ET

Crowds may have wisdom, but innovation is often the preserve of individuals. Investors have placed their bets on the health of pharmaceutical companies’ pipelines. The European sector now trades at close to 15 times forward earnings, up from about 10 times three years ago. But amid signs of a recovery in research-and-development productivity, is the industry displaying a herdlike mentality?In 2012, U.S. regulators gave 39 drugs the nod, more than they had in 15 years. Last year was less prolific, but sales of drugs coming through company pipelines are expected to more than offset the drag from pills losing patent protection in coming years. That has boosted hopes for growth.

A question arises over where R&D dollars are being allocated. Barclays says that one-third of spending is going into oncology and inflammation, despite these areas accounting for less than 17% of projected revenue.

New drugs don’t necessarily cannibalize sales of existing treatments. But if R&D spending is becoming more concentrated, firms may be swapping development risk for commercial and marketing risk. Where science is developing rapidly, drugs also may be overtaken by the next innovation.

Moreover, other areas of research may suffer. Treatments for diseases of the central nervous system have proved an unpopular area for investment, with Novartis,NOVN.VX +0.63% AstraZeneca AZN.LN +0.77% and GlaxoSmithKline GSK.LN +0.31%pulling back. That is partly due to relatively low success rates in late-stage trials.

But, Deutsche Bank argues, depression and schizophrenia alone constitute a $33 billion market, sales forecasts for pipeline drugs look low and regulators are tolerant of the difficulties in such trials. Today’s R&D efforts are bearing fruit, but there is something to be said for standing apart from the crowd.

Filed under Health

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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