In an uncertain market, pharmaceutical stocks are generally seen as a safe investment. Everyone needs healthcare and, although recession may impinge on consumer spending, health remains a priority, especially in the US and Europe.
The pharmaceutical companies in the Goodbody Sharetrack portfolio present an interesting range of options, from large blue-chip multinationals pharmaceuticals through Irish-based mid-cap speciality pharmaceuticals to contract research, diagnostic and distribution/sales companies. In assessing potential performance, two factors unique to the sector have to be considered in addition to present and near-future financial data.
The first of these is "pipeline". Pipeline is the portfolio of potential drugs a company is processing through discovery and regulatory channels before being released on the market.
A drug can take more than 12 years from compound discovery to release and can cost more than $500 million (#584 million) to develop. Only one in 1,000 compounds becomes a product, so positive "newsflow" can be an important driver of share price.
Companies are always on the lookout for that $1-billion drug!
Patent expiry is the second important factor peculiar to the sector. Investors must ensure that the main revenue drivers of any stock are patent-protected. When a successful drug comes off-patent, it is almost immediately put under pressure from cheaper generic products which can dramatically reduce market share. Of the larger blue-chip pharmaceuticals in Sharetrack, GlaxoSmithKline and AstraZeneca have seen marginal increases in price (2.7 per cent and 1.2 per cent) but Pfizer and Lilly (Eli) have fallen (4.4 per cent and 5.4 per cent respectively) over the last five weeks. As high-revenue generators, the larger groups are under pressure from investors to maintain double-digit growth.
Better value might be had from the Irish-based stocks, all of which have potential for considerable price increases in the short term. Elan's 12.5 per cent increase in five weeks has been fuelled by positive pipeline news on two potential blockbuster drugs. Galen (level) has moved into the high-growth, high-margin women's healthcare sector in the US, successfully integrating its recent acquisition of Warner Chilcott. Icon (up 14.5 per cent) operates in contract research, a sector that is gaining market support as consolidation at the larger end of the sector is now leading to contract flow.
The growing biotech sector is also increasingly outsourcing clinical trial work. United Drug (6.6 per cent increase) has just announced a very strong set of interim results. The company is actively diversifying into higher-margin contract distribution and contract sales both in Ireland and England, gaining market share.
The diagnostics manufacturer Trinity Biotech (level) shares rose recently on the back of general market interest in companies working in the genomics sector.
The company holds a 33 per cent stake in the UCC spin-off Hibergen that has developed a technology platform for genomic research.
Ian Hunter is an equity analyst with Goodbody Stockbrokers
