The UK pharmaceutical sector has recovered since the first series of US interest rate cuts and has o...
The UK pharmaceutical sector has recovered since the first series of US interest rate cuts and has outperformed the FTSE All Share by 3%, year to date, according to Keith Burdon, UK investment manager at Britannic Asset Management.
The sector, which is sensitive to interest rate cuts, fell when cuts first were announced in January, falling 8% in two days. It has recovered since then and has not suffered the same kind of downgrades as technology and telecoms.
According to Burdon, the best performing stocks, year to date, have been the speciality pharmaceutical stocks, of which he says the best have been Shire, Galen and Celltech. Shire is up 1.61% for the year to 16 March compared to a fall of 8.97% in the FTSE All-Share.
Of the big companies, GlaxoSmithKline and AstraZeneca, both in the top 10 of the FTSE 100, have marginally outperformed the market for the year to the middle of March.
Robert Moss, investment manager of Invesco's GT Growth fund, believes AstraZeneca has performed dependably against a market in a great deal of turmoil.
He says: "AstraZeneca has a good looking pipeline, which the valuation reflects. The risk, however, is that any disappointment will see share prices fall.
"With Glaxo the pipeline is not as attractive, so it is not as highly valued and there is less risk of disappointment. As a result, Glaxo offers less downside risk while AstraZeneca is a bit overvalued."
Trevor Green, UK fund manager at Credit Suisse, says that Glaxo has reported it is looking for compound earnings growth of 15% over the next three years. "With the global economy looking weak that is very appealing as it is on a premium to the market," he says.
Moss says that pharmaceuticals are seen as a safe haven in current market conditions but if the economy does turn people could desert these stocks and look for more exciting areas.
Green adds: "When global economic cycles are heading down, that is when drug companies come to the fore. Whatever happens people are going to still need drugs. There are stages in cycles when you want to be either underweight or overweight, but you should never get too negative on drug companies as they are long-term steady performers."
He says that Credit Suisse likes Glaxo because it is not as risky as Astra or the biotechs. It does not rely on the performance of one or two drugs to make or break the company.
According to Burdon, the disappointing stocks year to date have been the platform technologies, like Cambridge Antibody and Oxford Glyco Sciences, which tend to have strong technology but little to sell. As they are not yet making profits, they are difficult to value.
He says: "Our house view is that there will be a recovery in the second half of the year. We traditionally would expect the big caps to underperform because their valuations are not that demanding. We still favour mid-caps specialities, of which Shire is our favourite because it shows faster earnings growth. With Shire, we expect to see 20% to 30% earnings growth in the next few years; with Glaxo, we expect around 12% to 15%."
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