THE INVESTOR
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Balance sheet
Once a darling of the stock market,
pharmaceutical companies have struggled for much of
the past decade as the number of new discoveries has
dwindled and the costs of R&D have risen. There are,
however, signs that this is changing.
SECTOR FOCUS
Novartis for $16 billion and bought the Swiss
rm’s vaccine business for up to $7 billion.
They combined their consumer healthcare
divisions to create a business with $10 billion of
annual sales; and in the process, GSK returned
£4 billion to shareholders
4
.
The deal was the most complex to be
announced in recent times, but it was by no
means the only one. In May, P zer tried to buy
AstraZeneca for £69 billion, but was rejected
and walked away.The takeover would have
created the world’s largest drugs company; and
in that sense it followed a‘big is beautiful’
philosophy that prevailed in the pharmaceutical
sector for many years.
AstraZeneca, for example, resulted from a
merger betweenAstra and Zeneca, while GSK
was a product of a merger of GlaxoWellcome
and SmithKline Beecham (which were,
themselves, products of earlier mergers). In
recent years, however, the industry has adopted
a more focused approach to acquisitions; by
buying into biotech. In 2013, for example,
AstraZeneca made six acquisitions, ve of
which were biotech companies. Shire, the UK’s
third-largest listed drugs group, also bought
into biotech, acquiring US rare disease group
ViroPharma for $4.2 billion and is looking
at further large transactions in this sector.
‘Biotech rms give Big Pharma access to a
lot of innovation,’ says Pisani.
For many years the poor relation of the stock
market, biotech has become a star performer,
not least because of takeover expectations.
In 2013, the leading companies at the forefront
The US accounts for 43% of global
healthcare spend, but only 10% of that
is expenditure on drugs
Rest of the world ($3.8 trillion)
US ($2.7 trillion)
US spending on drugs ($0.26 trillion)
of innovative technology, including
constituents such asArkTherapeutics, BTG,
Consort Medical, Genus,Optos,Oxford
BioMedica, PuriCore, Skyepharma and
Vectura, delivered a return of more than 30%;
over ve years to the end of 2013 the return
was more than 140%.
‘Several of these companies have seen
a re-rating after achieving signi cant
milestones,’ says Malik.‘We expect this trend
to continue.The key point is this: if you want
alpha, you have to broaden your base. Put your
money where Big Pharma puts its money.’
Most biotech businesses do not pay
dividends, however, and this is where Big
Pharma comes into its own. In the US,
Johnson & Johnson has increased its dividend
every year for 52 years
5
.AstraZeneca and GSK
cannot point to such stellar performances, but
both have a reasonable dividend track record.
For income-seeking investors in a low-interest
environment, this can be comforting.
‘Con dence is returning, R&D is
improving, populations are ageing and using
more “drugs” and managements have become
more focused.Overall, we are very positive
about the pharma sector,’ says Lance.
1 Business Monitor International 2
3 PwC Pharma 2020 4
5
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