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Regression To The Meanest: How Markets Value Pharma Stocks

 
• By John Hodgson

Financial markets – the people and institutions that lend companies money and estimate their worth – see pharma companies as revenue-generating, profit-sharing black boxes. Growth earns companies a break from this simplistic view, but sooner or later market valuations of pharmas seem to regress to a mean based on revenue multiples. That mean is getting meaner.

Regression

For people close to it the pharmaceutical industry can appear rather complicated. Its arcane traditions and regulatory complexity woven with the mysteries of research and development and the black arts of marketplace survival create challenging intricacies in the mechanics of running a drug company. The products change, the markets change, the competition moves ahead, rule tweaks favor one company over another, developments falter and different leaders try to adjust the picture to the best of their ability.

The financial markets – and the people who operate in them – represent one of pharma’s most important dependencies, one that has increased markedly in recent years. For a start,...

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