By Antony Milford, head of healthcare investment at Framlington Fundamentally, the events of 11 S...
By Antony Milford, head of healthcare investment at Framlington
Fundamentally, the events of 11 September and subsequent hostilities in Afghanistan had little direct impact on the healthcare industry. There was some minor disruption in business from the cessation of airfreight and some unwillingness on the part of patients to travel to receive treatment but these were very much short-lived effects.
There was a brief speculative flurry in a number of stocks that were seen as beneficiaries of measures to combat bioterrorism. More importantly, the impact on consumer and business confidence has led the Federal Reserve board to lower interest rates more aggressively than would have been likely in the absence of the attacks.
Although, in the short term, the effect of the terrorist attacks was to weaken the economy, the Federal Reserve's response has arguably made it more likely that a recovery will occur in 2002, albeit from a lower base. Since healthcare companies are, by their nature, recession-resistant, the stocks tend to perform particularly well on a relative basis when investors are anticipating a slowing of economic growth.
The exception to this general rule is the biotechnology sector, which, though it shares the recession-resistant characteristics of other healthcare groups, has historically moved in the stock market more in line with the technology sector than with other healthcare stocks.
Although the larger biotech companies' shares are no longer cheap given the recent rally, it is believed there are still significant opportunities in the medium and smaller-sized companies. The recent newsflow from the biotechnology sector has been very positive with excellent sales growth from products already on the market, a number of significant product approvals and finally a succession of announ- cements of licensing deals between biotechnology companies and large pharmaceutical companies.
Because of the large numbers of major products going off patent over the next few years, the drug industry will need a significant flow of new products to maintain its recent mid-teens growth rate. It is clear that internal research and development is not going to be adequate to fill the gap, the historic new drug launch rate for the major companies being 1.4 new products per annum per company.
As yet there is no sign of any improvement in the productivity of drug company research and development. In addition to this, regulatory authorities (especially the US FDA) are being more demanding of drug companies over safety data on new chronic therapies, in the light of a number of recent product withdrawals due to adverse side effects. All this means that drug companies have more need to in-license late stage compounds than ever before and the negotiating leverage has moved in favour of the owners of such compounds.
If the recovery proves to be vigorous, larger healthcare companies' shares may underperform the market, but biotech- nology stocks and smaller companies generally are likely to benefit from the improvement in investor psychology.
Monetary easing from Federal Reserve.
Likely improvement in investor sentiment.
Opportunities in smaller biotechs.
Regulatory authorities becoming more exacting.
Larger biotech stocks no longer cheap.
Major products coming off patent.
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