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THE INVESTOR
Investors have long questioned whether the pharmaceutical
sector is the best place to put their money, but a number of
recent positive indicators suggest that Big Pharma is back
In some ways, it’s like
a very sophisticated
casino
By Joanne Hart
SECTOR FOCUS
PHARMACEUTICALS
I
n 2010, there were around 6.9 billion
people in the world. By 2020, the
United Nations estimates the
population will have swollen to more
than 7.6 billion.TheWorld Health
Organization forecasts that 30%will not take
enough exercise, 20%will be overweight or
obese and 13%will be 60 or older – all factors
that increase the risk of heart disease, diabetes,
cancer and dementia.
Not only is the population growing, it is also
becoming richer – and spending more money
on medicine. In 2011, for example, global
pharmaceutical sales were just over $1 trillion,
driven by growth of more than 20% in the
BRIC economies of Brazil, Russia, India and
China. If current patterns continue, global
drug sales are expected to reach at least
$1.6 trillion by 2020
1
.
Such forecasts would suggest that
pharmaceutical companies should be some of
the best-performing stocks in the market. But
they are not. Until they rallied this year, the
UK’s two best-known drugs groups,
GlaxoSmithKline (GSK) andAstraZeneca,
have persistently underperformed against the
broader UKmarket over the past decade
2
.
Like many of the world’s pharmaceutical
giants, they have been dogged by two principal
concerns: old drugs coming o patent and
new drugs being thin on the ground.
‘There was a wave of approvals about ten
years ago and most patents last for eight to
ten years,’ says Ian Lance, fund manager at
RWC Partners and co-manager of the
St. James’s Place Equity Income fund. But in
the past few years, research and development
(R&D) productivity has been declining. Lots of
money has been spent and there’s been
nothing much to show for it.’
According to consultancy PwC, the
so-called‘patent cli ’ will wipe almost $150
billion from drug company revenues between
2012 and 2018
3
.And nding new drugs is not
only proving more di cult than in the past, it
is also more expensive.‘The easy drugs have
been found and regulation is much tougher,’
says PwC partner Jo Pisani.‘If you include the
cost of failures, each product costs between
$2 billion and $4 billion to bring to market. In
some ways, it’s like a very sophisticated casino.’
With such high stakes, it is perhaps
unsurprising that many drugs groups are
associated with highly aggressive sales
techniques. GSK is under investigation by the
Serious Fraud O ce following allegations of
bribery in China and elsewhere. But many of
its global peers have been accused of bad
practice, too.
Against this backdrop, some investors might
question whether the pharmaceutical sector is
the best place to put their money. Fortunately,
there are signs that the outlook is improving.
First, the long spell of disappointing drug
discoveries appears to be coming to an end.
‘The number of innovative drugs in the
pipeline is growing and this could deliver
higher returns in the coming years,’ says
Navid Malik, pharmaceutical analyst at
broking rmCenkos.
The US Food and DrugAdministration
approved 27 new drugs in 2013, down
from the 39 in 2012 and 30 in 2011, but
still above the long-running average of 26.
‘R&D productivity is improving,’ says
RWC Partners’ Lance.‘We have had three
consecutive years of above-average approvals.’
And Lance thinks the worst of the fall from
the patent cli is now over.
Concerns about the impact on
pharmaceutical groups may also be overdone.
Lance adds:‘The US accounts for 43% of
global healthcare spend, but only 10% of that
is on drugs.When they work, drugs should
lower hospital costs by getting people home
faster and by helping to keep them out of
hospital in the rst place.This is what most
healthcare systems, including the NHS, are
focused on.’
Pharmaceutical companies are also tackling
their costs, not just by streamlining their
businesses, but also by taking a more creative
approach to growth. Earlier this year, for
example, GSK announced a multi-layered
asset swap with Swiss multinational Novartis.
The UK group sold its cancer portfolio to
