The overall size and makeup of the biotech industry’s profit pool has changed dramatically over the past ten years. (We consider the profit pool of biotech industry in terms of ‘Available Operating Cash Flow’…we assume: Available Operating Cash Flow = Adjusted Operating Cash Flow – Stock-based Compensation – Asset Write-down/Restructuring Costs + R&D Expenses.) Over the past 10 years, the size of the large cap biotech profit pool has grown from $9.9bn in FY2005 to $38.8bn in FY2014, implying a FY2005-2014 CAGR of ~16.4%. Excluding Gilead Sciences, the size of the biotech profit pool has grown from $8.9bn in FY2005 to $23.8bn in FY2014, implying a 2005-2014 CAGR of ~11.5%. Back in FY 2005, Amgen was by far the largest generator of cash flow at $7.1bn, accounting for 72% of the industry profit pool. As of FY2014, Gilead Sciences has overtaken Amgen to be the largest generator of cash flow at $15bn (vs. $12.2bn from Amgen), accounting for 39% and 32% of industry profit pool, respectively. Although growing in the absolute dollar amount, Amgen’s share of the industry profit pool has been shrinking over the years. As of FY2014, Gilead Sciences and Amgen combined accounted for 71% of industry profits, with Celgene(CELG), Biogen (BIIB), Regeneron (REGN), and Alexion Pharmaceuticals(ALXN) accounting for 10%, 12%, 5% and 3% of the industry profit pool, respectively…
Including Gilead, industry wide ROIC has been in the range of 15-19% in the past and increased to 28% in FY2014 due to Gilead’s strong ROIC. Excluding Gilead, industry wide ROIC has been stable at around 12%, with very small variations over the years, which is similar to the cost of capital for most large cap biotech companies. Gilead has consistently generated higher ROICs than its peers since FY2007; and Alexion Pharmaceuticals has generated higher ROICs than its peers (except Gilead) since FY2011. The ROICs for Amgen, Celgene and Biogen have been close to industry wide ROIC. We are yet to see a clear trend for the ROIC of Regeneron.
Shares of Gilead Sciences have dropped 0.4% to $107.57 at 3:30 p.m. today, while Amgen has dipped 0.1% to $155.51, Biogen has declined 0.7% to $302.25, Celgene has risen 0.6% to $123.82, Regeneron has slipped 0.4% to $535.88, and Alexion Pharmaceuticals is off 1% at $178.07.