Over the course of the third quarter of 2007, the MSCI Healthcare sector was toward the bottom end o...
Over the course of the third quarter of 2007, the MSCI Healthcare sector was toward the bottom end of the league table of quarterly returns once again, rising by 1.16%, slightly behind the broader market which rose by 1.95%.
Despite the traditionally "defensive" nature of the healthcare sector's earnings profile, the group has not outperformed during recent market turbulence in the wake of the credit-led downturn. In general, pharmaceutical stocks are not aggressively leveraged and not particularly vulnerable to rising borrowing costs and tighter credit market conditions. In addition, due to the characteristics of the demand side of this sector, earnings are also insulated to a large extent from any consumer-led slowdown in the overall economy.
The issues and concerns that have contributed to ongoing underperformance remain in the most part not yet fully quantified. Near-term patent expirations for a number of highly profitable drugs, together with the risks associated with the withdrawal of certain key products, continue to weigh upon sentiment.
Another important consideration is the US presidential election next year, which raises a further level of uncertainty that new legislation may be introduced which could have a further impact on overall levels of profitability.
Looking forward, these issues have been ongoing concerns for some while and the underperformance of this group versus the broader market suggests that, as ever, the market is already going some way towards factoring these uncertainties into valuations and estimates. In terms of large-cap pharmaceutical companies, more modest valuation multiples are likely to lead to some level of support for the remainder of the year. However, we continue to favour generic drug manufacturers, biotech and equipment/supplies companies.
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