When fellow participant pre-empted one of my 2025 predictions in an annual prediction show (see the show here), I was forced to scramble for another prediction. My improvised prediction for 2025 was that a bundle of Aspen Pharmacare and Sandoz AG will outperform a bundle of Eli Lilly and Novo Nordisk.
It is perhaps worth elaborating on why I think this:
At JP Morgan’s 43rd healthcare conference last week, the CEO of the world’s largest biosimilars (i.e. generics) business, Sandoz AG, said the following: “There’s more products coming off-patent in the next 10 years than has been in the history of this industry. … When we started this journey 5 years ago, we had 5 or 6 biologics in our pipeline. Today, we have 28.”
That is a pipeline CAGR of c.36~41% y/y for Sandoz!
And, all that Sandoz had to do to get access to this pipeline was wait for the patents to expire. This dynamic is largely true for the industry’s other generics players, but—given the cost of registration, manufacturing, and distribution—this industry still rewards large, diversified, well-funded incumbents.
Let’s use the new weight-loss/diabetes (i.e. GLP-1) drugs as an example.
The demand for these products has been such that these first-mover pharma-groups (Novo Nordisk and Eli Lilly) could not actually produce sufficient volumes to fill this demand. This has partly to blame for Eli Lilly having to strike a deal with Aspen Pharmacare to manufacture Eli Lilly’s Mounjaro drug locally, and now (or soon) Aspen can start to earn off Eli Lilly’s Intellectual Property.
Given the huge success of the GLP-1 drugs, other pharma-players have thrown massive R&D at this space too. FOMO on steroids! Thus, no one can be surprised that the number of new incoming GLP-1s to rival Novo Nordisk and Eli Lilly’s products is astounding, and many should be coming to market with the next year or three!
These incoming substitute products should help satisfy this unfilled demand, but they will also likely drive deflationary pricing in the industry (hurting Eli Lilly and Novo Nordisk revenues). This deflationary pricing will only accelerate in the coming years as the original drugs go off-patent and the army of generics companies all start producing them at fractions of the price for the end-consumer…
In other words, who wins here?
Well, ultimately, consumers who want cheaper medicine win. But, I think that the hyper-efficient generics groups that can harvest this “free” R&D and turn it into high-margin, in-demand product also win.
Generics businesses do have lower gross margins than ethicals, but they also do not carry the significant burden and risk of massive R&D (mis!)spend. Likewise, they achieve pretty defendable operating (and EBITDA) margins versus these R&D behemoths. Yet, when we consider their valuations, they are at material discounts to most of the Big Pharma groups. Namely, see below:
| Gross Profit Margin | Operating Profit Margin | Forward Price Earnings | Forward EV/EBITDA | |
| Aspen Pharmacare | 43.40% | 19.90% | 10.0x | 7.7x |
| Sandoz AG | 45.20% | 2.4%* ~ c.20% | 13.9x | 10.2x |
| Novo Nordisk | 84.70% | 46.40% | 23.1x | 16.3x |
| Eli Lilly | 80.90% | 36.50% | 33.4x | 29.3x |
| * Misleadingly low for various artificial reasons, EBITDA guidance of c.20% is more accurate as a base margin. | ||||
We can (simplistically) assume that generics and biosimilar’s pipelines (that have historically grown quickly) are going to grow even faster over the next decade. See the above quote from Sandoz for evidence. Adding to this growth, these stocks starting valuations look quite reasonable (perhaps even cheap). These factors—rising growth & low valuation—combine to imply broadly attractive returns in this space.
In contrast to this, Novo Nordisk and Eli Lilly have waves of deflationary and substitute product headwinds coming into their revenues (likely muting their future growth) and their stocks starting valuations appear quite rich (perhaps even downright expensive). Falling growth and high valuation are a potentially toxic combination. Thus, I think that a bundle of Aspen Pharmacare and Sandoz AG may well outperform a bundle of Eli Lilly and Novo Nordisk. If this in 2025, then perhaps over the medium term.
ARTICLE ORIGINALLY APPEARED ON MONEYWEB
* Keith McLachlan holds SDZ shares. Portfolios managed by him and portfolios across the group may also hold APN and SDZ shares.