The fundamentals of the US pharmaceutical sector are good, but the bugbear of pricing controls has se...
US president Clinton has been putting pressure on the pharmaceuticals to reduce drug prices for Medicare cases. So far they have resisted this move and, furthermore, they have been using their television advertising presence to support their point of view.
Clinton's irritation at this behaviour has led to an atmosphere of uncertainty, especially in the period up to the State of the Union address, which he could have used as a springboard for his counterattack. Speculation about what legislation he might attempt to introduce was rife.
Alison Smith, fund manager for Investec Guinness Flight, says: "What seemed likely was that the pharmaceuticals would provide some sort of pricing discount for those in the Medicare group. The financial impact, while not devastating, would have been enough to slow earnings growth down."
In the end Clinton chose not to force the issue, but the possibility of this kind of intervention hangs round the neck of the entire sector. Indeed, recent investment interest has come not from new drugs, but from the convoluted round of merger talks between three of the largest US companies - American Home Products, Pfizer and Warner-Lambert.
Long-term earnings of these companies is based largely on the quality of the products coming out of their R&D department. The process of drug testing and approval is transparent which ensures the markets react far in advance of actual changes in earnings growth. Pharmaceuticals need to keep discovering new drugs to match the rate at which they lose the patent on the old drugs and become prey to low-price competition.
Smith points to the lack of potential high earning 'blockbuster' drugs in the pipeline as a negative for the sector, at least in the medium term.
However, she is neutrally weighted. This is because of the high barriers to entry and because she sees the fundamentals of many of these companies as healthy. There is a good demographic reason for this - the post-war baby boom generation is reaching the age where drug intake increases. The market is becoming much broader.
Steven Arnold, fund manager for Threadneedle, says: "Our current stance is neutral on the healthcare industry, but looking ahead there are fundamental positives. Drug therapy is extremely cost-effective treatment so there will always be a drive toward developing therapeutic drugs."
What made financial headlines over the weekend?
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch