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Gilead, AbbVie Are Innovative, but May Be Underappreciated

In a previous article, we looked at the Pharmaceutical Innovation Index and how there was no correlation between some of the companies at the top of the list and their stock performance.

One glaring example is Gilead Sciences Inc. (NASDAQ:GILD), which was rated the most innovative in 2019. The company's share price has dropped nearly 19% in the past two years, though it has made somewhat of a comeback this year with a gain of $5 to nearly $66.

Mike Rea, CEO of IDEA Pharma, the U.K-based consulting firm that publishes the annual index, told me in a phone conversation that in Gilead's case, there are likely two reasons for the disconnect. One, it appears its success in innovating has not been fully recognized by stock analysts. Second, there are questions as to whether the company knows how to build on its past achievements as it strives to diversify into new therapeutic areas.

"I'm not sure it's Gilead's phase I or II drugs that are affecting its stock price; it's those that are outside its core antiviral therapeutic areas," Rea said. "For example, they have yet to show they can be a factor in the oncology market."

Rea acknowledged the link between innovation and stock price is a tricky one. He noted that when you look back to 2009, when IDEA started the annual index, Johnson & Johnson (NYSE:JNJ) had top ratings for the first several years, which was eventually reflected in the company's financial success and its share price.

"There is a correlation between innovation--the ability to launch well--and stock performance, but it is triangulated with the company's ability to 'invent,' that is to develop a strong pipeline of launchable assets," Rea said. "The 'invention index,' plus pipeline and R&D strength, reveal where a company is going, not where it's been. A remarkable percentage of Gilead sales are coming from newer products. However, the market still allows companies with older drugs to perform well because of incremental innovation and price increases, so there may be a lag."


Second-ranked AbbVie's (NYSE:ABBV) shares have also slumped, down about 17% since September 2017 and are off $17 from this year's high of about $89.

Rea suggested AbbVie's problems are the same as Gilead's, but with a twist.

"They have relied almost wholly on Humira throwing cash into the company," he said. "They have been better than Gilead at diversifying, but are making the same overinvestment mistakes, with Rova-T being an obvious example."

Only the top 30 pharma companies by market cap are considered for the index. This is an issue inasmuch as the smaller biotechs, outside the top 30, are now launching more products in aggregate than the larger companies, Rea pointed out.

"However, any one company may bring to market only one or two drugs a year," he said. "Of course, this relatively small number can boost earnings and make the companies attractive investments."

Rea named several companies--including Acadia (NASDAQ:ACAD), Sage Therapeutics (NASDAQ:SAGE) and maybe BioMarin (NASDAQ:BMRN)---that will be in the next wave of innovators.

"They will be bringing a different R&D and commercial approach, blurring the lines between biotech and pharma," he said.

Disclosure: The author owns a position in Johnson & Johnson.

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This article first appeared on GuruFocus.