Gloom lifts over pharmaceutical sector

Healthcare companies look attractive as a long term investment because of the positive influence of demographic trends. Despite the fact that in October the MSCI Healthcare index slightly underperformed the MSCI World index the sector offered some good news.

Fernando Luque 13.11.2002
The behaviour of the big pharmaceutical shares varied widely over the last month. For example, Merck’s share price rose 19% compared with a loss of almost 1% for GlaxoSmithKline. This shows how heavily the performance of funds in this category relies on their individual portfolio holdings.

Many healthcare firms announced third quarter earnings’ figures in October. Highlights included a 19% gain in third quarter profit for Johnson & Johnson and a lower year-on-year third quarter profit for Merck. Both results were in line with analysts’ expectations.

The biotechnology subsector had a good month with the Nasdaq Biotech index gaining 10%. For some experts the sector had reached an attractive valuation level after the sharp sell-off in June and July.

Perspective

The big pharmaceutical companies are facing undeniably difficult times because of expiring patents and competition from generic drug makers. Yet AstraZeneca recently scored a legal victory over several generic drug companies which had infringed on one of its patents.

The appointment of a new commissioner of the American Food and Drug Administration is an encouraging sign for the sector. The post had been vacant for over a year. Experts believe the appointment will accelerate the approval of new drugs.

The general view is that 2003 will be a better year for the big pharmaceutical companies. First, because the current cycle of patent expiries will be nearing completion and has already been discounted into the share prices. Second, because firms will launch more products after the uncertainties concerning the drug approval process partially disappear.

Outlook

Defensive sectors – those that tend to move in the opposite direction to the economy - such as healthcare should outperform the overall market if the uncertainty about the global recovery remains. But if the economic situation improves there is also the risk that investors may be attracted to more economically sensitive sectors such as technology, media and telecoms.

Most analysts say the earnings’ reports from the biotechnology sector were generally upbeat with most of the bad news widely anticipated. In addition, a seasonal factor could also positively influence the sector. According to a JPMorgan Fleming fund manager: “Historically the sector performs better in the second half of the year and the next round of clinical meetings on new drugs in the next few months should help improve confidence in the sector”.

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Fernando Luque

Fernando Luque  es el Senior Financial Editor de www.morningstar.es