Pharmaceutical companies are not investing enough in research and development and as a result have f...
Pharmaceutical companies are not investing enough in research and development and as a result have few new drugs in the pipeline with top line growth on average between 5%-6.
A few years ago companies in the sector enjoyed growth of around 10%. Gartmore is underweight in the sector with around 6.5% exposure, whereas the index figure is 9.
Guillaume Rambourg, investment manager at Gartmore, said: "There is a lack of new products appearing on the market and many existing ones are approaching their expire dates, when the company loses its patent for the drug. Also, governments are reducing social security budgets, putting pricing pressures on drug companies.
Though the general trend in the industry is one of lack of product innovation, there are certain companies that are manufacturing new drugs.
Rambourg said: "Our largest pharmaceutical holding is Swiss company Roche. Recently it launched an anti-obessity drug it claims reduces weight by 10%-15%. There is a real demand for this kind of drug. In addition the company has launched a flu drug.
"Another company we favour is Sanofi-Synthelabo. The French company was previously two separate ones and we had exposure to Sanofi. The new company has a good product pipeline and is benefiting economies of scale brought on by the merger.
Investec Guinness Flight believes the sector may never return to its former glory.
David Potts, fund manager at Investec Guinness Flight, said: "We are underweight in the sector and the question is whether things will get better. In the US earnings growth is in double digits with blockbuster new products earning millions of dollars.
"But in Europe year to date earnings growth has been in single figures. Apart from the lack of new products in the pipeline, European companies are suffering from compartaively small sale forces on the ground.
"The only way companies can increase profits is through cost cutting measures. The prices of stocks have been discounted in the market due to the problems the sector has, but the prices are not giveaway ones and exceptional value is just good value. We are not looking to reduce our weighting further and may actually increase playing on the weakness of the sector.
Johnson Fry has been increasing its exposure to the sector over recent months and is now marginally overweight to the market.
Rupert Morrell, investment manager at Johnson Fry, said: "The sector offers good value and earnings growth potential twice that of European GDP growth in the medium and long term. If you took a snapshot of the sector now the picture would not be good with the lack of new products coming on to the market.
"However, companies such as Novartis and Roche will come through and develop more new products in the next few years.
"In addition there is still the consolidation theme to play. No one drug stock has more than 5% global market share, which will not remain the case in a few years time.
The group has also been increasing its exposure to telecom and information technology stocks.
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