Earlier this decade and in the 1990s the ethos was merge or die and big pharma got even bigger. The last wave of mergers in the sector led to the top 10 pharmaceutical companies reaching close to 50 per cent global market share.
But the reality is that size has not reduced the patent expiries of blockbuster drugs and the consequent threat from generic drugs. Big pharma is also extremely vulnerable to health and safety concerns for pharmaceutical products.
Shareholders reacted, sending share prices spiralling. In the past 12 months the share prices of GlaxoSmithKline and AstraZeneca have fallen by as much as 22 per cent and 30 per cent respectively.
But these issues ignore the inherent strength of big pharma – massive cash flows. GlaxoSmithKline and AstraZeneca have combined revenues of £49.7bn that are forecast to grow 2.5 per cent a year over the next two years.
Their profit growth is slowing due to the above factors, from double digit to mid-single digit. But investors are being swayed by the strong and stable income being offered (both have dividend yields close to 4 per cent).
Nomura Code's analyst Paul Diggle says that these companies represent a good hedge for investors against the imminent slowing of the global economy led by declining house prices in the US: “They are either defensive plays or yield plays. If their yield approaches 5 per cent, I have no doubt investors will quickly buy the shares.”
Yields could well climb further as investors get nervous about signs that the government fears of electoral backlash following years of escalating drugs prices.
The potential election as President of the United States of the Democrats and in particular Hillary Clinton many believe will signal aggressive action by the government in curtailing rising prices.
Such events underscore the declining growth rate in the sector. But demand for big pharma’s product will not wane and investors can take advantage of this.
