Two failed megamergers rocked the pharmaceuticals and biotechnology sector last year. In April, just four days after we advised buying shares in AstraZeneca (AZN) (3,754p, 16 April 2014), news emerged that US giant Pfizer (US:PFE) was interested in buying the Anlgo-Swedish company, partly to streamline its tax affairs and repatriate a significant cash pile. AstraZeneca repeatedly rejected Pfizer's advances, and the deal officially collapsed in late May. Encouragingly, however, the deal hype that drove AstraZeneca's share price to a five-year high last spring seems to have given way to confidence that the company, with its strong oncology pipeline, can manage on its own. The share price still hovers around £46 a share.
AstraZeneca wasn't the only pharma giant targeted by a would-be US tax exile. After the Pfizer deal fell through, it wasn't long before US group AbbVie (US:ABBV) set its sights on speciality pharma outfit Shire (SHP). Shire has long been touted as a takeover target, but has always rebuffed offers. The agreed takeover with AbbVie therefore came as a surprise to the market.
But the US Treasury's drive to clamp down on tax-driven foreign mergers prompted AbbVie to pull out of the deal in mid-October. Shire's stock plummeted 30 per cent. While some investors - and certainly some fund managers - lamented this turn of events, with hindsight it presented a buying opportunity for new investors. Shares in Shire have always traded at a premium, reflecting the company's track record of growth.
AstraZeneca's main rival, GlaxoSmithKline (GSK), was left out of the takeover game. 2014 was not a vintage year for the UK drugs giant, with a corruption scandal in China followed by a profit warning in July. Importantly, directors at GSK seem to have recognised the weaknesses in the business and are doing something about it. In April, the company agreed an "asset swap" with Swiss group Novartis (NYSE: NVS): GSK agreed to sell its oncology unit to Novartis for $16bn and buy the Swiss group's vaccine unit for up to $7bn. The two will also develop a co-owned consumer health arm in a joint venture controlled by GSK, which will own a 64 per cent share.
The deal was well received. Analysts at Deutsche Bank said GSK's vaccines business would be all the stronger for the addition of meningitis treatments from Novartis, and would also have better access to emerging markets. At that point, analysts believed GSK would be left with four core businesses: respiratory conditions, HIV, vaccines and consumer healthcare. But in late October GSK revealed plans to sell off a stake in its HIV business, ViiV Healthcare. Co-founded with Pfizer, Viiv has done well. In 2013 it won regulatory approval for a new drug - Tivicay - which City analysts said could push ViiV's total revenues to £2.5bn by 2018. However, analysts worry that GSK's decision to sell its stake was motivated by the need to unlock short-term value for shareholders after a pretty difficult year.
By way of contrast, BTG (BTG) had a very successful 2014. The international healthcare company didn't grab headlines like GSK and AstraZeneca. But the shares found real momentum last summer, when the group reported double-digit sales growth across all three of its divisions - interventional medicine, speciality pharmaceuticals and licensing. Shares in veterinary specialist Dechra Pharmaceuticals (DCH) took off too after it announced a stronger second half for the year to June 2014.
A new addition to the sector is Indivior (INDV), the pharma spinout of consumer goods giant Reckitt Benckiser (RB.). The company - which develops treatments for various addictions - joined the FTSE 100 just before Christmas. But it might not remain in London for long. Roughly 80 per cent of group revenues come from the US, and chief executive Shaun Thaxter has said he is keen to review the company's official domicile.
| Name | Price (p) | Market value (£m) | PE ratio | Dividend yield (%) | 1-year performance (%) | Last IC view |
| AstraZeneca | 4,712 | 59,513 | 92.9 | 3.6 | 19.4 | Hold, 4,413p, 31 October 2014 |
| BTG | 808 | 3,084 | 48.7 | 0.0 | 32.7 | Hold, 748p, 11 November 2014 |
| Dechra Pharmaceuticals | 870 | 765 | 23.1 | 1.8 | 23.3 | Hold, 743p, 8 September 2014 |
| Genus | 1,250 | 762 | 26.9 | 1.4 | -10.9 | Hold, 1,144p, 3 September 2014 |
| GlaxoSmithKline | 1,466 | 71,279 | 17.0 | 5.5 | -11.8 | Buy, 1,356p, 16 October 2014 |
| Hikma Pharmaceuticals | 2,352 | 4,672 | 21.3 | 0.0 | 86.2 | Hold, 1,778p, 20 August 2014 |
| Indivior | 165 | 1,186 | NA | 0.0 | NA | n/a |
| Shire | 4,798 | 28,310 | 43.0 | 0.3 | 60.0 | Buy, 4,668p, 14 January 2014 |
Favourites
AstraZeneca and GlaxoSmithKline are frontrunners if investors are looking for blue-chip income. The former offers a stronger growth story, while the latter could be in for a better 2015. Trading is strong at BTG and Dechra, but shares in both companies trade at premium ratings. As we explained in our recent tip (Buy, 4,515p, 27 Nov 2014), Shire's stock is also expensive, but that's easily justified by the best growth record in the sector.
Outsiders
Shares in generics business Hikma Pharmaceuticals (HIK) have risen 74 per cent year on year, but carry a lot of risk, given the company's exposure to Middle Eastern markets. Half-year results in June revealed an ongoing decline in the generics division, although this was offset by sales of injectables in the US. Genetics supplier Genus (GNS) also had a tricky 2014. Profits slid in Asia due to low pork prices, but chief executive Karim Bitar hopes global trends will improve in 2015.
