This is why I am bullish on pharmaceuticals

I am bullish on investing in pharmaceutical companies, and this is why.

Article updated: 26 October 2020 1:00pm Author: Michael Baxter

When I look at the world’s leading pharmaceutical companies, I see a mixed picture. In the UK there are two giants.

Astra Zeneca, with a market cap of around £100 million, has seen shares almost double in the last five years. Dividend yield is just shy of three per cent, but if you bought five years ago your yield would be close to six per cent, pretty good. You may recall, in 2014 Pfizer tried to buy Astra Zeneca with a £70 billion bid, so I think we can now say, with the benefit of hindsight, the UK company was right to turn the deal down.

For many years, GSK was the UK’s biggest pharmaceutical. But shares today are roughly the same level they were at five years ago, allowing Astra Zeneca to overtake it in the market cap league. GSK’s dividend yield is just short of six per cent, not bad.

So far, I would say of the UK pharmaceuticals that performance has been alright, but not scintillating. So why am I so bullish?

Let’s look further afield. At the moment, the biggest pharmaceutical by market cap is Johnson and Johnson. Shares have increased 45 per cent over the last five years. Next is Pfizer, shares flat. Other giants include Roche — shares up about ten per cent over five years, Novartis, shares flat and Sanofi, where shares have also been flat.

I am not wowed by this. So why am I bullish on pharmaceuticals?

There are two reasons and one question.

Demographics

Reason number one is obvious and often cited: demographics. The world is getting older (at least the non-African part is). This will create huge growth in demand for healthcare, which will surely benefit pharmaceuticals.

AI and genome sequencing

Reason number two is less clearly understood, technologies such as AI will help support the increased development of new drugs. Let me cite as an example, the development of a vaccine for Covid-19. I read that the Astra Zeneca vaccine deal with Oxford University could allow it to make a 20 per cent margin.

Now, I am not saying buy Astra Zeneca because of this possible vaccine. It might be a good investment for that reason, but I fear the upside is already priced in. I am making a much broader point. It looks like a Covid vaccine, or vaccines, will be developed in record time. Actually I understand this. The time from inception of virus to vaccine looks like it is going to be an incredibly short period.

Technologies such as genome sequencing and AI are making it possible to develop drugs at a speed for which there is no precedent.

Doubt

My doubt applies to technology more generally. Fields such as nanotechnology and gene editing tools such as CRISPR/cas9 will transform healthcare. Wearable technologies combined with AI will change healthcare to becoming more preventative. Stem cell technology will support the development of organs without the need of a donor.

This is all truly exciting stuff, not just for investors but humanity.

My doubt relates to whether the pharmaceutical players will grab the resulting opportunities.

My feeling is that they might and if they do, shares will excel. But if they don’t, for the other reasons I mention, I think they will do pretty well, regardless.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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