By Keith Birdon, fund co-ordinator of the Britannic Global Healthcare Fund Last year was not a v...
By Keith Birdon, fund co-ordinator of the Britannic Global Healthcare Fund
Last year was not a vintage one for the global pharmaceutical sector. It came under attack from a number of different angles at a time when its historic attractiveness as a defensive growth sector should have been highly valued.
The FDA has been blamed in part for the industry's current woes, with accusations of risk aversion, slow or non-existent decision-making and a lack of direction. The appointment of Mark McClellan as the new FDA commissioner has been welcomed by the industry, at least in part because the post had been vacant since January 2001.
McClellan's background is in both medicine and economics, making him an ideal candidate to tackle the difficult issues facing the industry.
R&D productivity has been the other main problem that held the sector back in 2002. For the third year in a row new product approvals were lacking in excitement. Only 17 new chemical entities were approved, well below the disappointing 24 achieved in 2001. Looking ahead 2003 is unlikely to be a bumper year given the low level of new drug filings last year, but it would be nice to think that with a more energised FDA, the rate of through-put at least won't deteriorate any further.
Following the Republican's success in November's congressional elections, the sector should find itself less exposed to US political debate. The prospects for the establishment of an industry benign Medicare prescription drug benefit are now higher than they have ever been in the last 10 years and, wars permitting, should carry some presidential momentum before George Bush seeks re-election in 2004.
Valuations are towards historical lows. From a cashflow perspective the sector looks great value at present, with stock prices assuming that the woes of 2002 will be repeated in 2003 and far beyond.
On the downside generic companies continue to gain traction through successful court battles and profitable product launches.
While by no means predictable the industry really needs a major court victory against a generic company to remind the investment world that it is not all one way traffic.
Healthcare reforms in Italy, France and Germany will put pressure on the industry in 2003. However this will tend to have a more significant impact on those companies based closer to these countries rather than the US stocks which make up the majority of the sector by market capitalisation.
Currency is a double edged sword for the global sector with the European companies currently suffering, in a translational sense, from the weakness of the dollar against the euro and sterling, but the US stocks with European exposure are benefiting.
Britannic's Global Healthcare Fund has been underweight (relative to its benchmark) in large-cap pharmaceutical stocks since launch in March 2001.
However, the weakness in share prices over the second half of 2002 has encouraged the managers to significantly reduce this underweight stance.
Drug approval times should speed up.
Valuations discount a negative scenario.
Balance sheets and cash generation strong.
Reforms in Liverpool will impact in 2003.
R&D could be in cyclical downturn.
Patent challenges won't go away.
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation