Pharmaceuticals are making something of a comeback now that technology stocks have reached such high...
Pharmaceuticals are making something of a comeback now that technology stocks have reached such high valuations.
Henderson Investors and Gartmore are both positive on pharmaceuticals despite the sector underperforming recently through being labelled as "old economy" stocks, amid the emphasis on telecoms, media and technology.
John Griffiths, pharmaceuticals analyst at Hendersons, says the group has recently moved from a neutral to an overweight position in the sector.
Griffiths says: "This is based on the fact that pharmaceuticals are steady earners and will grow by 10-20% annually, regardless of economic circumstances and the interest rate cycle.
"Among the so called old economy stocks, pharmaceuticals stand out in that they are not at threat of internet competition as are many other companies in other sectors. In many cases, anyone with a lot of capital can compete with incumbents, for example banks and retailers.
"With pharmaceuticals this can not happen as they will need the expertise and approval of authorities. Likewise there is not the competition from the Far East for the same reasons."
Although these stocks have been underperforming ahead of the US election and threats of healthcare reforms, Hendersons is confident this will come to nothing.
Meanwhile drug stocks are historically cheap, for example in the UK and Europe they have historically traded on premiums to the market of around 70% but are now trading on a premium of around 20-25%.
Griffiths says: "Going forward, these companies will benefit from the genomic revolution, with strong product potential being identified. For example Glaxo SmithKline has a big genomic division and is well placed to take advantage of this revolution."
He is less positive on biotechs. These have had a strong run in the past six months but do not have the cash flow of mainstream pharmaceuticals.
Unless they produce a blockbuster product they have little room for further upside, Hendersons believes.
Stephen Rowntree, global pharmaceuticals analyst at Gartmore, says that despite the sector currently being out of favour, the ageing population worldwide will ensure continued growth in demand for pharmaceuticals.
The key market remains the US, where prescriptions grew by 16% last year, compared to 7% in both Europe and Japan. Looking to the future the US should continue to be the main driver of growth for the sector, even with impending product patent expiaries that will slow growth prospects for some of the major players.
Rowntree says: "One of the big challenges for pharmaceutical companies globally is the increased concerns being expressed about spiralling healthcare costs, an issue which has already been highlighted in Europe and during the current US presidential election."
Rowntree is confident the drug companies can fend off such worries with a stream of new product and he foresees further consolidation in the sector.
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