FTSE 350 Review: Pharma’s defensive qualities shine through

The company recovered swiftly following the blood clot scare that scuppered the rollout of its Covid vaccine. It now trades on a premium to most of its US and European peers, which analysts at Shore Capital have said “is warranted based on its industry-leading earnings growth and pipeline prospects”. 

AstraZeneca already has one of the strongest portfolios of oncology drugs in the global pharmaceutical sector, and it’s also developing a number of promising treatments. This is the golden scenario in the pharmaceutical world: the strongest companies will always have current best-selling drugs and groundbreaking treatments in the pipeline.

Of course, that’s easier said than done – especially given the relatively short time period for which drugs are awarded patent protection. Once a drug loses exclusivity, generic copycats flood the market and drive the price of the branded drugs down. 

Hikma Pharmaceuticals (HIK) specialises in the manufacture of these generic drugs. This side of the sector has recently been squeezed by input cost pressures on one side and drug price erosion on the other. 

Hikma, however, also sells branded drugs in the fast-growing Middle East and north Africa market – and has significant sales and manufacturing capacity in the region. Many of the medicines Hikma supplies in the Middle East are for chronic conditions, which broker Numis says is down to “diets/lifestyles driving more developed-world diseases”. 

People in rich nations are generally sicker than they were before the pandemic for a multitude of complex (albeit interlinked) reasons. This could drive demand for drugs that treat particular chronic health conditions.

In the US, life expectancy hit a 25-year low in 2021 due to Covid-19 and the ongoing opioid crisis. London-listed Indivior (INDV) almost exclusively makes drugs that treat opioid use and addiction – meaning demand for them is high and will remain so as long as the crisis persists. The company is currently gaining what Stifel analysts call “great commercial traction” with Sublocade, a once-monthly injection for managing opioid cravings and withdrawals. It’s expected that sales will have exceeded $400mn (£324mn) in 2022, and the company has forecast peak annual sales of $1.5bn.

The pharmaceutical sector is generally defensive during economic downturns, in part because medicines are essential items – whereas most consumer goods are not. This is even true of veterinary pharmaceuticals, which specialist developer Dechra Pharmaceuticals (DPH) can attest to.

“A recessionary period could therefore prove to be somewhat similar to the pandemic period just experienced, without the work from home and new pet ownership tailwinds,” predicted Numis analysts in a note last summer.

Although spending on pets slowed during the global financial crisis of 2008-09, it nonetheless continued to grow. This bodes well for Dechra’s fortunes in the current climate. However, expectations of defensiveness do have a downside in the form of premium pricing. 

In June 2021, Dechra’s shares were trading at a hefty 46.5 price/earnings ratio. FactSet puts analyst expectations at a more palatable 22.1 times for June 2023.

The resilience of healthcare and pharmaceutical demand makes it an attractive investment prospect in otherwise difficult times. But would-be investors must always ensure a company’s pipeline is robust enough to warrant enthusiasm.