The pandemic shone a spotlight on the pharmaceutical and biotech industry and their share prices hit new highs as a result.
Big pharmaceutical players have continued to perform well into 2022 even as other sectors flounder in the face of the cost of living crisis and rising inflation.
Broad exposure to the sector means investors can capitalise on the increased long-term demand for healthcare solutions.
GSK shares have crashed as it spins off its consumer goods company Haleon
The pharmaceutical industry has undergone significant change over the past few years.
While the Covid vaccines made headlines, years of research are starting to bear fruit for big players like AstraZeneca and GlaxoSmithKline.
But with a recession looming will pharmaceutical players be able to sustain their momentum? And could it be a good time to invest in biotech firms, which have seen their shares languish?
The Covid vaccine has raised AstraZeneca’s global profile significantly and in February it reported a record quarter for revenues including $1.8billion from the Covid vaccine and sales from its $39billion acquisition of Alexion. It also increased its dividend for the first time in a decade.
AstraZeneca is now the second largest FTSE 100 company by market cap after doubling its share price in five years and is a popular holding among income funds including Artemis and Columbia Threadneedle UK Equity Income fund.
‘Big pharma as represented by FTSE 100 constituents AstraZeneca and GlaxoSmithKline have performed well in the wider market slump this year. Their shares are up 28 per cent and 8 per cent, respectively, in the year-to-date,’ says Garry White, Charles Stanley’s chief investment commentator.
‘Covid-19 related sales are slowly unwinding, but the loosening of pandemic restrictions have boosted sales of other vaccines, sales of cancer drugs have been rising – and the major players have good pipelines of potential new products in development.’
GSK has also performed well – in the first quarter sales increased 32 per cent and operating profits increased by 65 per cent.
But it has a bumpy ride ahead of it following the sale of its consumer business Haleon, which has this week listed on the London Stock Exchange.
The demerger will change the shape of GSK as it becomes a pureplay pharma group. Its consumer healthcare business was largely predictable with stable income and its shares have already crashed on Haleon’s market debut.
While Haleon’s opening day trading has been at the lower end of expectations, for investors looking for a more stable income it could prove a promising investment.
‘Fundamentally, this is an attractive industry and business to have exposure to given its defensive characteristics at a time where volatility is upsetting markets,’ says Chris Beckett, head of equity research at Quilter Cheviot.
‘The business itself has strong brands and market positions in oral health, pain relief, digestive health, vitamins and respiratory health and there is no reason to think these cannot be maintained.’
Just how recession-proof are pharmaceuticals?
In general investor demand has been relatively resilient despite the economic downturn because they’re considered safer and more defensive stocks.
Ailsa Craig, joint lead investment manager at International Biotechnology Trust says: ‘In a recession, food and healthcare are usually prioritised by consumers, and the need for medical treatments does not diminish. In fact, the population of those over 65 year olds who are most likely to need medical care is set to double in the next generation.
‘Therefore, while insurance coverage may be slightly scaled back leading to some price pressure, especially for non-essential treatments, overall pharmaceutical industry sales, particularly of products that treat critical conditions, are unlikely to be greatly affected by a downturn in economic growth.’
Healthcare conglomerates have historically been a collection of disparate businesses which include consumer health, pharmaceuticals, animal health and some might even have medical device businesses.
‘There’s an understanding a broad group will give you a more defensive portfolio. Consumer health is defensive… pharmaceuticals might seem defensive but you need to acquire more products because you lose exclusivity. There are more peaks and troughs,’ adds Andrew Duncan, senior equity analyst at Killick.
How do investors know which are the best to invest in?
‘An investor should look for a company with good research and development (R&D), a good pipeline and track record of delivering that pipeline,’ says Duncan. ‘You need to have lots of eggs in the basket.
‘We look at the overall direction of travel… we look to invest in companies that supply into that R&D universe. The life sciences and tools area… there is demand for services but we’re not necessarily reliant on the success of an individual product or trial.’
Companies that are set to benefit from this demand include US-listed Thermofisher, which specialises in scientific and just acquired a clinical trials business.
Is it a good time to buy volatile biotech stocks?
Biotech companies, at the intersection of pharma and tech, also proved to be beneficiaries of the vaccine bounce.
Since skyrocketing in 2020, shares in biotech firms have however tumbled amid the rotation away from growth stocks. The Nasdaq Biotechnology index has had a volatile three years, peaking in 2021 followed by a prolonged retraction.
‘This overshooting and correction in performance is quite typical of the biotech sector but the overall trajectory has been positive with an outperformance against the UK FTSE 100 over the past three years,’ says Craig.
International Biotechnology Trust is unusual among growth share-focussed investment trusts in paying a substantial dividend, with a current yield of 5.01 per cent.
The trust holds a broad spectrum of companies, the majority of which have an approved drug already on the market. These include Horizon Therapeutics, Incite and Neurocrine.
While biotech is an exciting sector for investors, it is inherently risky and investors buying individual stocks can expose themselves to significant volatility.
White says: ‘The current problem for companies operating at the cutting edge of biotech is that, like research and development in more traditional tech sectors, these businesses need a substantial amount of investment up front to compete their R&D.
‘Any revenues for their products, although they may be substantial, are unlikely to materialise for many years to come. It’s all a case of ‘jam tomorrow’.
‘Such business depends on borrowing – and higher borrowing costs today means lower realised profit over the longer term.
‘The amount of interest they will now have to pay has a direct impact on the valuation of these businesses in City analysts’ models. As interest payments rise, future earnings forecasts and price targets are lowered.’
Biotech darling Oxford Nanopore has certainly suffered since its market debut last year. It is down 52 per cent since its listing and 56 per cent year-to-date.
In March it reported annual losses jumped by more than £100million because of costs relating to its IPO and share-based payments. It also took a hit from the end of a contract with the Department of Health and Social Care, offering rapid Covid tests.
White continues: ‘The future for the healthcare sector is undoubtedly bright, with exciting progress in areas including mRNA-based vaccines, gene therapy, and monoclonal antibodies.
‘Nevertheless, sentiment towards the biotech sector is cyclical and the structural pressure on the racier end of the sector remains substantial.
‘Rising interest rates, inflation and geopolitical uncertainty adds to the downbeat sentiment surrounding these assets because of the length of time they need to deliver profitability mean they are long duration, risky assets.
‘Negative factors that will cloud the sector outlook will be in place for some time. It is likely that Big Pharma, with its diverse product base and multiple revenues streams will continue to be investors favoured way to play the sector for quite some time. Right now, safety matters.’
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