By Bambos Hambi, head of multi-manager investment at Rothschild Asset Management While some glob...
By Bambos Hambi, head of multi-manager investment at Rothschild Asset Management
While some global growth fund managers prefer cyclical stocks to pharmaceuticals in the short term, most continue to look to the sector's longer term demographic underpinning.
Among those avoiding pharmaceuticals in the short term is Venkat Chidambaram, investment director of GAM's global investment team.
Chidambaram has reduced exposure to the pharmaceutical sector from 16% in 2001 to 2%, favouring cyclical stocks in the light of an expected global economic recovery.
He says: 'Over the next six months, it is likely capital will leave the pharmaceuticals sector for cyclical areas if economies continue to stabilise.'
In addition to this, earnings growth is looking weak for many pharmaceutical firms, according to Chidambaram.
Many large pharmaceutical firms face increasing competition as a result of patents ending, which allows companies based in emerging markets to produce cheaper versions, he says.
Investors can therefore hedge against patent problems by investing in emerging markets pharmaceutical companies.
Healthcare reform in the US threatens the profits of pharmaceutical companies with the possibility that prices, particularly on drugs for the elderly, will be cut, says Chidambaram.
Paul Cooper, head of thematic research at Sarasin, disagrees with such an assessment of the sector. He thinks that as we are in a difficult economic environment, the global pharmaceutical sector is a good area in which to invest.
'There has been faster growth in this sector than in the economy as a whole, but you need to stockpick to avoid losing patents and having a blockbuster drug blocked,' he says.
There are difficulties in the market, which have increased the need for careful stockpicking. These difficulties are highlighted by the recent performance of the S&P Pharmaceuticals Index, which makes up just over 10% of the entire S&P 500 Index.
In the period from 31 December 2001 to 4 October 2002, the S&P Pharmaceutical Index was down 26.8% in US dollar terms.
Compared to the broader index, which fell by 29.5%, that performance is relatively strong, but it lagged behind other sectors such as gold, casinos, and gaming and brewers, and core consumer sectors such as household products and food distributors.
Patents ending is a constant problem and one that has become more significant as patent regulations have become less clear.
Demographic changes mean there is likely to be an increasing market for pharmaceutical firms. However, increasing healthcare spending has led governments to place an increasing burden for pharmaceutical expenditure directly on consumers.
'This is likely to stem market growth,' says Cooper. Lifestyle drugs will be more susceptible to this as consumers will cut back in this area first, he adds.
Advances in the systems for checking drugs before they reach the market have increased the cost and time involved in developing new drugs, he notes. A patent's life is shorter as it begins when the compound is registered ' not when the drug is available to consumers.
Pharmas have long term demographic support.
Invest in companies with strong pipelines.
Sector offers strong growth prospects.
Many pharmas have drug patent issues.
Equity weakness could damage real economy.
Accounting concerns remain.
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