Have expectations been missed in the sector when investors look to Big Pharma for reliable performance?
The underperformance of Big Pharma
Stocks within the pharmaceuticals sector come in many flavours. You have the safe and steady pair of hands that sell their pharmaceutical products through times of economic growth and through recessions with little volatility in revenues as healthcare needs tend to be independent from the state of the economy. Investors have come to rely upon these companies as a source of predictable dividend income streams. In this sector you also have many companies with no track record of any profits at all, as all capital and efforts are focussed on developing drugs and treatments; the premise being that a successful R&D programme and regulatory approval could bring substantial profits in time.
Covid-19 has come to affect companies and sectors in different ways; many Retail and Travel & Leisure companies have collapsed or they're close to it, while it's been a boon for the Tech sector along with staples such as supermarkets. Many investors would have thought that it should have been good times for the established pharmaceutical groups as well. However, this crisis is unprecedented in its nature and is proving to be a bit painful for companies who once sailed through past crises.
While the likes of Pfizer and AstraZeneca have stolen the headlines with their successful vaccines for the virus, most other pharmaceuticals have failed to develop their own, or not even tried. GSK’s attempt at a vaccine did not amount to much which has effectively now been abandoned. The group is now switching manufacturing capacity to help produce others vaccines while focussing R&D on vaccines that tackle emerging variants of the disease. For AstraZeneca and the other companies with successful vaccines, it does not seem as though, nor is there much intention to make big profits from this crisis and they should be lauded for this. Astra has made it clear that it will sell the vaccines at cost to many countries.
Without profiting from vaccines, the big pharmaceutical's share prices have not lept higher from the crisis. In fact they have been more of a victim. Lockdowns and fear of catching the disease has left patients across the world reluctant to visit their doctors for other ailments, resulting in fewer prescriptions written for medicines. These effects have left 2020 as a disappointing year for GSK where adjusted earnings declined by 6% and it's share price languishes below the April level when the overall market bottomed. At the time of writing, AstraZeneca’s 2020 results are yet to be published but it too will feel the impact and it's share price has drifted lower to pre-Covid-19 levels.
The big two UK listed pharmaceuticals are popular amongst UK investors but their poor performance raises investor anxiousness. As new strains of the virus emerge, investors have been ditching these shares, since the return to normality will be further into the future and expecting the first half of 2021 at least to be another poor period. However, at these lower levels I feel that for the longer term investor there is opportunity. Both have faced the patent wall where a number of their key drugs faced an expiration of exclusive licences allowing generic manufacturers to steal market share. Knowing this, they ramped up R&D spending some years ago and we are beginning to see the fruits of this as newer drugs account for ever larger portions of the groups sale with the product pipeline still expanding.
In all this time both of them have been solid dividend payers even at the start of the crisis when other income stalwarts retrenched. GSK’s indicative forward yield is an amazing 6% while AstraZeneca is showing closer to 3% while the risk associated with these companies will still be lower than that of most other companies. I feel that now is a time to be taking a closer look at these companies rather than to shun them.
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