As pharmaceuticals have fallen out of favour their share prices are being driven by factors other th...
As pharmaceuticals have fallen out of favour their share prices are being driven by factors other than a wall of money.
Pharmaceuticals form the third largest sector in the UK, at 10.5% of the FTSE All-Share, and it is heavily dominated by three companies - Glaxo Wellcome, SmithKline Beecham and AstraZeneca. Relative to the FTSE All-Share the sector is down some -8% over the past three months.
John Wilson, investment director for Standard Life, says: "We were heavy in pharmaceuticals throughout 1998. We took some money out in January and are now underweight."
As bond yields rise he is moving into cyclicals but he still thinks pharmaceuticals are a good long-term investment. The over 65s consume four times the amount of medicine as the under 65s consume, according to Wilson, so with a larger old population, the pharmaceuticals stocks will consistently benefit.
Glenn Meyer, fund manager at Pavilion Asset Managers, says: "The drop in popularity of pharmaceuticals may have come from short-term speculators who were selling stock. That is probably over now. Many pharmaceuticals offer good double-digit earnings growth - so on a medium- to long-term view they offer good value."
Wilson's preferred stock is SmithKline because of the release of a potential blockbuster drug - a diabetes medicine called Avandia. It has been approved by the Food and Drugs Agency (FDA), giving SmithKline access to the US market, which accounts for half the global medicines market.
The time limit on patents is a thorny issue for pharmaceuticals. The patent for Losec, Astra-Zeneca's anti-ulcer drug, expires in 2002. It is AstraZeneca's biggest-selling product. When a patent expires, sales typically fall 70% to 80% as competitors undercut the brand. Astra claims it can protect that market. It is testing a new version of the drug which it hopes will outperform the old one.
Meyer says: "It is clear that there is something to be gained if there is some consolidation. Undoubtedly, there will be more actions of the type that brought Astra and Zeneca together."
Pharmaceuticals face another problem in being denied access to markets. Recently, the FDA prevented Glaxo's anti-flu drug Relenza from being sold in the US. The company is reapplying, but it shows corporate profitability can depend on a government organisation.
Meyer says: "The propensity to consume pharmaceutical products in the US is greater than elsewhere. Health insurance allows access to physicians and specialists but it is more cost effective to send someone back to work on a drug treatment programme, where they can remain economically active, than send them to hospital. For similar reasons, health providers tend to avoid operations.
"Development times are coming down and this means bad projects can be scrapped more quickly. The life cycle of drugs will go down, as the limiting factor for a drug's profitability will stop being the patent, but the production of the next generation drug.
"The market will be lacklustre for a while. Then there will be a good pick-up as companies release good news and in recognition of their earning growth."
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