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Sept. 14, 2022, 7:48 a.m. EDT

AstraZeneca, Eli Lilly and Roche among pharmaceutical companies upgraded for high returns on R&D investments, analysts say

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By Anviksha Patel

Shares in pharmaceutical giants including Roche, Novo Nordisk, Eli Lilly and AstraZeneca were little changed Wednesday despite getting a ratings boost from analysts at Berenberg, who cited respective returns on research and development investment and the ability of those companies to withstand pressure coming from recent U.S drug price reform.

London-listed AstraZeneca /zigman2/quotes/203048482/delayed UK:AZN +0.73% /zigman2/quotes/200304487/composite AZN -0.07% and Novo Nordisk’s /zigman2/quotes/207193277/delayed DK:NOVO.B +0.40% stock was down almost 1%, while stock in Roche /zigman2/quotes/206324342/delayed CH:ROG +0.42% was up 0.76% and pre-market movement in U.S-listed Eli Lilly & Co /zigman2/quotes/200106384/composite LLY -1.55% increased 0.91%.

Berenberg upgraded both Roche and Merck & Co MRK to Buy from Hold. The bank downgraded Bristol-Myers /zigman2/quotes/202559280/composite BMY -0.35% and Novartis CH:NOVN to Hold from Buy. The team retained its Buy recommendations on AstraZeneca, Eli Lilly and GSK /zigman2/quotes/200381158/delayed UK:GSK -0.13% .

AstraZeneca, Eli Lilly and Novo Nordisk have weathered the uncertain macroeconomic market and garnered investor attention since the start of the year, the analyst team said in a Wednesday note.

In contrast, competitors GSK and Sanofi’s /zigman2/quotes/206928357/delayed FR:SAN +0.20% stocks took a significant hit due to concerns swirling around its case on Zantac. Berenberg estimates both stocks losing $12 billion of market cap each.

“Throughout this year, growth names, such as AstraZeneca, Eli Lilly and Novo Nordisk, have remained in favour. In the context of the wider market, we expect the relative simplicity of these stories to remain an attraction,” said the team led by analyst Kerry Holford.

Pricing reform

Berenberg also pointed out the recent passing of the U.S. Inflation Reduction Act (IRA), which included provisions to mediate drug pricing, ultimately a negative action for the industry. The restructuring requires the pharma sector to fund 20% of drug costs above $2,000 out-of-pocket expense and price negotiation on mature drugs by Medicare.

“For drugs at risk of price cuts from 2026-30, companies have less scope to adapt (via price increases, cost reduction or termination of R&D),” they explained.

“For new drugs about to arrive on the market, new behaviours could be exhibited (delaying launch, raising launch prices, limiting investment).”

Those companies which will pull through the downsides of the reform, the analysts say, are those who can “regenerate their portfolios most effectively and replace maturing drugs with innovation,” namely AstraZeneca, Eli Lilly and Roche.

Return on R&D investment

In an updated note on return on R&D investments, Berenberg said the average pharma giant is tracking to an average 10% return on investment (for the 2016-2022 pipeline cohort), against a cost of capital of 8%.

The highest average return was at Novo Nordisk, the lowest at Novartis.

The analysts identified the individual companies on track to deliver average returns (2016-22) above the cost of capital are Novo Nordisk, Eli Lilly, AstraZeneca, AbbVie /zigman2/quotes/202428675/composite ABBV -0.01% , Roche and Merck & Co.

Looking further back, Berenberg also evaluated the returns on investment made 10 years ago and found an average 9% return on R&D.

Bristol-Myers topped the list with a return of 18% — driven by its drugs Eliquis, Opdivo and Yervoy.

AstraZeneca had the lowest return at 0% due to its failures for fostamatinib, lesinurad, Movantik and TC-5214.

/zigman2/quotes/203048482/delayed
UK : U.K.: London
11,260.00 p
+82.00 +0.73%
Volume: 1.13M
Dec. 5, 2022 4:35p
P/E Ratio
102.66
Dividend Yield
1.97%
Market Cap
£173.21 billion
Rev. per Employee
£426,154
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/zigman2/quotes/200304487/composite
US : U.S.: Nasdaq
$ 68.43
-0.05 -0.07%
Volume: 3.40M
Dec. 5, 2022 3:51p
P/E Ratio
104.73
Dividend Yield
2.08%
Market Cap
$211.59 billion
Rev. per Employee
$544,657
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/zigman2/quotes/207193277/delayed
DK : Denmark: OMX
kr. 900.60
+3.60 +0.40%
Volume: 1.03M
Dec. 5, 2022 4:59p
P/E Ratio
38.85
Dividend Yield
1.24%
Market Cap
kr.2019.48 billion
Rev. per Employee
kr.3.50M
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/zigman2/quotes/206324342/delayed
CH : Switzerland: SWX
CHF 309.55
+1.30 +0.42%
Volume: 1.22M
Dec. 5, 2022 5:30p
P/E Ratio
17.51
Dividend Yield
3.00%
Market Cap
CHF254.02 billion
Rev. per Employee
CHF637,961
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/zigman2/quotes/200106384/composite
US : U.S.: NYSE
$ 368.96
-5.80 -1.55%
Volume: 1.71M
Dec. 5, 2022 3:51p
P/E Ratio
55.44
Dividend Yield
1.06%
Market Cap
$356.09 billion
Rev. per Employee
$835,414
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/zigman2/quotes/202559280/composite
US : U.S.: NYSE
$ 80.85
-0.28 -0.35%
Volume: 4.34M
Dec. 5, 2022 3:51p
P/E Ratio
26.33
Dividend Yield
2.67%
Market Cap
$172.50 billion
Rev. per Employee
$1.45M
loading...
/zigman2/quotes/200381158/delayed
UK : U.K.: London
£ 1,422.20
-1.80 -0.13%
Volume: 5.57M
Dec. 5, 2022 4:35p
P/E Ratio
4.24
Dividend Yield
0.04%
Market Cap
£57.58 billion
Rev. per Employee
£378,097
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/zigman2/quotes/206928357/delayed
FR : France: Euronext Paris
85.94
+0.17 +0.20%
Volume: 1.33M
Dec. 5, 2022 5:35p
P/E Ratio
16.30
Dividend Yield
3.87%
Market Cap
€108.00 billion
Rev. per Employee
€421,366
loading...
/zigman2/quotes/202428675/composite
US : U.S.: NYSE
$ 163.64
-0.02 -0.01%
Volume: 3.47M
Dec. 5, 2022 3:51p
P/E Ratio
21.83
Dividend Yield
3.61%
Market Cap
$289.43 billion
Rev. per Employee
$1.16M
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