18th September 2019

19th September 2019 – Future Market Value Model

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Vysyble and The Barbour Partnership have undertaken an extensive financial study which examines the shareholder value dynamic for the world’s 15 largest Pharmaceutical companies by revenue with a combined market capitalization in excess of US$2.2tn. The research focuses on the period 2013 – 2018 using full-year company results and it examines:

  • The performance of each business from a shareholder value creation perspective
  • Current company internal performance in delivering financial returns relative to the cost of capital
  • The future business performance implications for each company as demanded by share prices

London – 19th September 2019.

Vysyble and The Barbour Partnership have undertaken an extensive financial study which examines in detail the shareholder value dynamic for the world’s largest 15 Pharmaceutical companies by revenue.

In using a proprietary Future Market Value model, current performance using the Economic Profit metric and the future rate of economic performance required to meet the expectations built into the prevailing share price can be calculated.  The quantum of ‘expectation’ for each company relative to the current share price can be expressed as a percentage of the share price.

The result is that shareholders and investors can make qualified judgements on future company performance using value-based measures.

Key findings include:

  • Overall Total Shareholder Return performance for ‘Big Pharma’ has fallen markedly from an average of 36.2% in 2013 to 5.9% in 2018 with clear winners and losers.

  • Collective Economic Profit returns across Big Pharma have reduced by 62.04% with values close to the actual cost of capital thus signaling an end to a period of significant growth.

  • Just two of the Big Pharma companies (Gilead & Roche) have produced annual economic returns above the cost of capital over the entire period of analysis. The remaining companies produce a much more mixed picture of performance with 5 of the 15 companies rarely posting an economic surplus.

  • Investor expectations of future economic returns as calculated by the Future Market Value model have soared by a factor of two from US$767.6bn in 2013 to US$1,543.3bn in 2018 which represents 59.1% of the total Enterprise Value for 2018.

  • We believe that the combination of rising expectations and falling actual performance means that share prices for many of the 15 companies have reached challenging levels with the Future Market Value model indicating potentially significant future share price reductions.  If the capital markets believe that the companies will only achieve 50% of Future Market Value total, this could potentially result in a 35% reduction ($771.6bn) in market capitalization levels. Using current (September 2019) share prices makes minimal difference overall.

  • Even if Big Pharma increases expansion into “new” large markets such as China, Indonesia, and India, the calculated economic returns will not be enough to meet current levels of expectation as determined by the Future Market Value model.

  • Conversely, there will be huge opportunities for those businesses which understand the reality of the situation and can deal with the overall deterioration in shareholder value facing Big Pharma.

Therefore, the future “winners” in Big Pharma will be those which adopt an early view of the sector’s economic realities and set out to actively manage their way through them.


‘For the first time in the Pharmaceutical sector, we can see the exact amount of shareholder value-based expectation incorporated in a share price using measurable elements,’ commented Professor John Barbour.

‘The top 15 Pharmaceutical companies are finding it increasingly difficult to generate a positive economic return with collective economic profits falling from US$32.55bn in 2013 to US$12.35bn in 2018, a reduction of 62.04%. This is despite revenues rising from US$513.51bn in 2013 to US$587.78bn in 2018, an increase of 14.46%. On a three-year rolling basis, the economic profit yield is just 0.09% for 2018,’ said Roger Bell, a Director for Vysyble.

‘There is a clear and increasing gap between current value-based performance as evidenced by the falling levels of economic profit and the rise in shareholder expectation as calculated by the Future Market Value model. This raises profound concerns regarding the Pharmaceutical companies’ capability in satisfying the heightening levels of expectation and their share price values if they cannot do so,’ said Professor Barbour.

The Economic Profit measure considers all the costs of doing business such as taxes and capital charges including that of equity capital. In our opinion, the measure delivers a much more transparent view of financial performance.