The biggest problem the world has faced in the past 12 months has been health-related, but many of the pharmaceutical giants have had a difficult year. AstraZeneca ((AZN) offered to manufacture Oxford University’s Covid vaccine at cost. The reward was abuse and a stock price that fell nearly 6% in one year from the FTSE 100’s profit of about 19%.
Pfizer (PFE.N) did better with a plus of almost 13%, but in the context of the American markets, which rose by around 45%.
These two aren’t outliers. The forward P / E (price gain) of the MSCI World Healthcare Sector compared to the MSCI All-Country World Index is almost as low as it has been since the great financial crisis. What’s happening?
As the vaccination program is rolled out, many think this is a good time to invest in health care. The speed with which the various vaccines have been developed underscores the exciting opportunities for Big Pharma in the next generation of gene sequencing. Oxford University’s vaccine was developed within days of the DNA sequence arriving from China. Within a few weeks, the scientists had prepared samples for experiments in the laboratory.
Similar science is helping drug companies study the gene sequences of various types of cancer and develop more effective treatments that use the immune system to do its own healing. Some of them are already top-selling drugs, including Merck’s Keytruda, which revolutionized the treatment of skin cancer and some types of breast cancer. It looks expensive but has fewer severe side effects than chemotherapy or radiation, which is better for patients and can reduce the overall cost of care.
Clinical trials have been difficult to conduct during Covid, so we expect an onslaught of similarly exciting drugs over the next year. Not all pharmaceutical companies will benefit from this. Swiss company in Europe Roche (RO.SWX) made some smart strategic acquisitions in this cutting-edge area of science a decade ago. Other European pharmaceutical companies seem to have no potential new products. When companies pay huge dividends instead of investing in research and development, I worry about their long-term drug pipelines.
Sanders is serious
So we like some pharmaceutical companies, especially Roche and Merck (MRK.N)However, we recently sold the latter. We may buy it again later, but right now it’s weighed down by the shift to the left in American politics. Bernie Sanders has long argued that Big Pharma is kidding people, and it’s easy to see why. According to research, Americans pay an average of two and a half times more for their drugs than most developed countries.
In March, Sanders, who now holds a senior position in the Senate, introduced three bills aimed at locking prices back. If they pass, Medicare and Medicaid can negotiate what they pay for. Currently, the US is the only developed country where Big Pharma can calculate full list prices, even though the system then has numerous discounts. Sanderswant’s drug prices paid in the US are compared to prices paid overseas, and Americans are also said to make it easier to import drugs – prices in Canada are much lower.
There are some Democrats who believe that any kind of government-dictated pricing would be too left for them. So the legislation can be watered down. However, drug prices are under serious pressure.
The companies that have been hardest hit are those that make popular treatments for the most common health problems like diabetes, asthma, and rheumatoid arthritis. All in all, these place the greatest burden on the budget and are therefore in the first place for tough price negotiations.
It has always been difficult for drug companies to justify the profit margins on individual drugs, but for every drug that is successful, you have to pay for many more that fail. You will have noticed that the science behind Covid vaccines, while advanced, is not just reserved for one pharmaceutical company, which is why several seemingly effective versions were quickly discovered. Without the exclusive approval of drugs, the traditionally high margins could come under even greater pressure. On the other hand, the new approach to treatment design may result in fewer products turning out to be dead ends.
While we are cautious at Big Pharma, the excitement for the scientific response to Covid is still showing in our portfolios. The health area in which we see the most reliable growth and profits is diagnosis and testing.
We like scientific equipment manufacturers like Thermo Fisher (TMO.N) and PerkinElmer (PKI.N)who have benefited from Covid testing. The rally in their stocks has brought them to multiples of 30 times and 20 times historical earnings, respectively, and both yield a frugal dividend of 0.2%.
Prices have been falling lately, which some might see as a buying opportunity. Wall Street believes the Covid tests have collapsed and we will soon no longer need them to continue.
That feels premature – as personal experience can confirm. Even if this is not the case, modern healthcare will increasingly place demands on complex tests. We are at the beginning of a wave of new tests based on the latest breakthroughs in biochemistry and a deeper understanding of disease progression. People will have their entire genome analyzed to see what diseases they are likely to get, what to avoid, and what ailments to investigate as they age.
We’ll see more testing inside the NHS to give doctors more data, which should enable faster, more effective diagnosis and hospitalization, and reduce misdirected expenses, treatments, and time.
While scientific supply companies (mostly a handful of multinationals listed in the US market) still look expensive, they have strong sales growth, fat margins, and lots of repeat business. They ship the test equipment to hospitals quite cheaply and then sell the reagents and other materials at a cheaper price. So they are very money generating.
It seems ironic that the world’s largest pharmaceutical companies should face the greatest pressures on prices and profits when they have best demonstrated their value to society. I have some compassion for her. I’m not sure if this price cut will be beneficial for all of us in the long run, but I don’t see Bernie Sanders drop the problem easily. He has waited 30 years to tackle it since first representing Vermont in 1991.
We are looking for tailwinds and try to avoid headwinds. If the weather changes, we can go back to our preferred pharmaceutical companies. For now, we will continue to focus on testing.
Simon Edelsten: Big Pharma is facing a test after the success of Covid