Six months ago, the pharmaceutical sector was riding high, buoyed by its defensive merits and corp...
Six months ago, the pharmaceutical sector was riding high, buoyed by its defensive merits and corporate activity. Since then, the sector has fallen sharply relative to a depressed stock market.
Concerns regarding a string of patent expiries, together with news that a number of high-profile drugs have failed to meet market expectations, have dampened sentiment towards the sector.
However, none of this news is particularly new. The market has known about the glut of patent expiries for a number of years and has also witnessed a steady fall in the number of drug discoveries since 1996.
A recent article in the International Herald Tribune highlights this lack of innovation. It said: 'The number of approved new molecular entities (NMEs) peaked in 1996 at 53. However, during 2001, only 24 NMEs were approved and in the year through to September 2002, only 11 NMEs have passed muster, a rate that could lead to the lowest NME annual approval total seen since the 1980s.'
This has occurred at a time when R&D budgets have grown substantially and, ironically, great strides have been made in the area of gene sequencing.
Despite this, investors must not lose sight of the compelling long-term investment story behind the pharmaceutical sector. Two factors underpin growth. First, healthcare spending is going to grow disproportionately over the next decade as a consequence of the ageing world population and, second, the spend on drugs within this total is likely to be an increasing proportion because of health economics.
Research has shown the cost of treating a disease through the use of drugs is about 10% of the cost of hospitalisation. Therefore, governments have a huge economic incentive to encourage their use wherever possible.
Concerns regarding the dearth of new drug discoveries are as much overdone today as they were in the 1980s.
It is a function of good fortune, rather than the scope and scale of the research effort, a factor many analysts appear not to recognise.
If history repeats itself, we are in for a period unprecedented new drug discovery just as we saw in the 1990s. This surge in new drug discovery ironically is the reason behind the current spate of patent expiries that are blighting the industry today
Despite having bounced from the lows seen in September, pharmaceutical share prices remain depressed. Current valuations suggest the market believes the sector has gone ex-growth.
We believe this is unlikely, however, and there are still opportunities around for long-term investors.
Turning to stock selection portfolios should be biased to those companies that not only have the strongest drug pipelines but also have the greatest potential to discover new drugs. These might not be the ones who are spending the most on R&D.
String of patent expiries.
Dearth of new high-profile drugs.
Lack of evidence to support growth story.
According to Cicero report
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24 companies wound up