Pharmaceutical companies proved a safe haven for investors in 2008, easily outperforming the broader market. The FTSE 350 Pharmaceutical and Biotech Index was only one of two sectors to rise in value over the year, and it healthily outperformed the FTSE 350 Index which fell by 33 per cent. Moreover, all companies have been rising impressively in recent months, as takeover speculation is rife in a sector flush with cash and experiencing continuing strong demand.
Since the start of December, shares in the two largest companies, AstraZeneca and GlaxoSmithKline, have risen 11.5 per cent and almost 13 per cent, respectively, while attention-deficit hyperactivity disorder specialist Shire Pharmaceutical has bounced just over 15 per cent. Even after the rises, Astra and Glaxo continue to deliver impressive prospective dividend yields of 3.4 per cent and 4.4 per cent, respectively, underlining their attractions to income investors seeking a home in defensive non-cyclicals.
This year will prove a tougher proposition for the pharma giants, as key blockbuster drugs come off patent protection and competition from generic drug producers attacks their existing markets. This is magnified for AstraZeneca, whose drugs research pipeline is less advanced than Glaxo's. Broker Charles Stanley forecasts that Astra's sales will have risen 7 per cent to $31bn (£21bn) last year, but by 2014 its revenues are expected to drop back to $22.5bn. In their favour, the bigger pharmaceutical companies have been rigorously cutting costs out of their organisations, so earnings are still growing.
In the case of Shire, the company has managed to forge a niche in a number of highly specialised biological medicines that are very difficult to replicate. One company that sees itself very much in the mould of Shire is BTG - one of the few beneficiaries of consolidation at the smaller end of the sector. The speciality pharmaceutical company merged with Protherics and is now in the middle of deciding exactly what form its research portfolio will take.
But life has proven extremely difficult for healthcare companies. For example, the so-called sale and lease back model followed by nursing home operator Southern Cross Healthcare, underwritten by low interest rates and rising property prices, faltered amid credit crunch conditions. That company's shares have declined by more than 80 per cent over the past 12 months and it duly disappeared out of the FTSE 350.
The past year was very much a case of survival of the fittest in the sector and we have no doubt that in 2009 only the strongest will deliver positive returns for shareholders.
SUMMARY OF SECTOR:
| Company | Price p | Mkt. value £m | PE ratio | Yield % | 12M price chng % | Last IC view |
|---|---|---|---|---|---|---|
| ASTRAZENECA | 2794 | 40,432 | 10.4 | 3.4 | 30.1 | |
| BTG | 142.5 | 364 | NA | NIL | 47.7 | |
| DECHRA PHARMACEUTICALS | 380 | 249 | 18.3 | 2.2 | 3.5 | |
| GENUS | 694 | 413 | 21.7 | 1.4 | -16.9 | |
| GLAXOSMITHKLINE | 1266.5 | 65,694 | 12.6 | 4.4 | -0.3 | |
| HIKMA PHARMACEUTICALS | 322 | 609 | 12.5 | 1.3 | -33.7 | |
| SHIRE | 1034 | 5,791 | 67.6 | 0.4 | -7.6 | |
| SMITH & NEPHEW | 447 | 3947 | 12.9 | 1.4 | -23.3 | Good value, 508p, 28 Nov 2008 |
| SSL INTERNATIONAL | 480.5 | 922 | 25.6 | 1.6 | -10.4 | |
| SYNERGY HEALTH | 395 | 213 | 10.8 | 2.7 | -49.7 |
