Pharma’s mega-trends should unlock returns

Philip Salter
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STAGNATING product development, a tough regulatory climate and pressures from generic producers have seen the profits of the pharmaceutical industry take a hit in the last decade. However, the next chapter in the story should see a reversal, as big pharma takes advantage of ageing populations, the growth of emerging markets and a biotech revolution.

Over the last decade, investing in big pharma has not been profitable. Michael Hewson of CMC Markets points out that both GlaxoSmithKline and AstraZeneca plummeted. The former dropped from 1,700p in 2001, hitting a low of 980p in mid-2008, and is still languishing below 1,250p. Regulations have proved a serious impediment to growth, both in the lengthy process to get new drugs to market and the limitations on drugs allowed to be marketed as new. The generic industry has also hit profits. GlaxoSmithKline chief executive Andrew Witty has stated that we are living through a “patent cliff”, with around $200bn of earnings opening up to generic producers between 2008 and 2012.

But there is light at the end of the tunnel. Ageing populations in developed economies and growing wealth in developing markets mean that demand should grow. India’s Associated Chambers of Commerce and Industry (Assocham) expects that by 2015 the Indian pharmaceutical industry will reach $20bn. UK pharma companies should be able to cash in. Neil Woodford, the influential fund manager of Invesco Perpetual, said in February that the industry is “being given away by the stockmarket.” He has skin in the game, with over $4bn of the $17bn he manages invested in the sector. Living legend Jim Mellon predicts a mega-trend in bioscience. He is so convinced he will soon have a book out on the subject. Crucially, biotechnology is not easily copied, so this could see a huge reversal in the fortunes of the industry.

Recently there have been some big moves in the pharmaceutical industry. Last Monday, GW Pharmaceuticals jumped 3.1 per cent to 108p as news that it signed up Novartis to sell Sativex, its cannabis derived drug for treating the spasticity caused by multiple sclerosis. Also, it was confirmed yesterday that Johnson & Johnson is in talks to buy Synthes, the American manufacturer of medical devices. Both have risen in response to the talks. This is part of the ongoing consolidation and collaboration across the sector, which traders can profit from. Smith & Nephew’s shares took a dive on the news that its Johnson & Johnson takeover looked unlikely.

In deciding whether to go long or short on a particular stock, patent contracts and legal battles need to be taken into account, particularly for the short-term trader. Also, with the consolidation through mergers and acquisitions continuing across the sector, traders will need to be prepared for jumps in the stock price. These could offer either a nasty or nice surprise depending upon whether the position is long or short. For traders that want to take a bet on the whole sector, IG Markets offers spreads on pharmaceuticals and biotech stocks across the FTSE 350.

Although pharmaceutical stocks are viewed as defensives, as the sector is in flux it offers the trader the opportunity to cash in on any volatility. In the short-term, it looks to still have a way to go to make a full recovery, but if Woodford and Mellon are right, a well-timed CFD would see profits from a sector returning to health.