Can you Find it – Business © 2017 THE FULL STORY…RISKS AND REWARDS OF INVESTING IN PHARMACEUTICALSPublished in Can you find it Business Edition on Thursday, December 1st 2015
Pharmaceuticals companies have endured a torrid time in recent years. Concerns over patent expiries, the regulatory outlook and a weakening US dollar have conspired against drug manufacturers.
Last year’s decision by the US Food and Drug Administration to withdraw Merck’s anti-arthritis drug was a blow to the industry. The major UK pharmaceuticals stocks did not escape unscathed as investors fretted over prospects for an industry suffering from high competition and firm regulation.
Share prices across the industry have done little to excite investors since the heady days of the late 90s, but a shift in sentiment and a rebound in the dollar may provide the catalyst for change. In 2015 alone, the share price of Glaxo-SmithKline (GSK) has risen 21%. The upturn is not confined to GSK, as other drug and biotechnology stocks have broken out of their recent trading ranges.
Analysts are again showing signs of interest and earnings expectations are being revised upwards. GSK’s new approach to research is partly responsible for the group’s change in fortunes. To maintain success, GSK must continually replenish its drugs pipeline and the sums being spent on research and development are vast. Scientists at GSK have been split into entrepreneurial teams, each given their own budget, and the strategy is now bearing fruit.
With money pouring into research facilities across the industry, it is perhaps surprising that cures for cancer, in its various forms, have yet to emerge. GSK is not alone in the search, but analysts believe that Cervarix, GSK’s cervical cancer vaccine, could deliver annual sales of £2-4bn by 2010. The vaccine has yet to be granted regulatory approval but this is expected next year.
The size of the drugs development pipeline is mirrored by the array of products currently in the market. Advair, the group’s largest selling product, is used in the treatment of asthma and has annual sales of £2.46bn. Avandia, another of GSK’s blockbusters, used in the treatment of diabetes, generated sales of £1.1bn in 2004, an increase of 32%. In the US alone, 18m people suffer from diabetes, providing further scope for GSK to increase market share.
However, the pharmaceuticals industry is continually evolving and the threat of generic competition will not go away. The recent recommendation by the US Food and Drug Agency that GlaxoSmithKline’s Advair should not be used as the primary drug, sent GlaxoSmithKline’s share price 3.9 per cent lower on the day. The announcement served as a timely reminder of the regulatory problems facing large pharmaceuticals companies and the risks therefore associated with investing in the sector.
The share price of companies such as GlaxoSmithKline are often based on the perceived potential of drugs which are still at the research and development stage. The share price will remain at risk to one off announcements and will benefit from positive news flow regarding future potential blockbusting drugs.
Londonn speciality paper group James Cropper announced its interim results recently, stating that they had experienced a challenging start to the current financial year.
The increase in energy costs experienced last year has continued into this year and demand from Europe has been poor. However, the group is looking to recover some of the higher charges by passing on some of the increases in costs to its customers, while the firm also noted that the past quarter has seen some improvement in its UK and European markets.
The group’s retail division, The Paper Mill Shop, like many shops in the High Street, has felt the effect of the slow down in consumer spending, although overall, due to new stores opening in Mansfield and Hatfield, sales rose 30 per cent compared to the same period last year.
Greggs, the High Street bakers, produced a credible three per cent increase in second half sales compared to the same period last year. I say credible, due to the lower number of shoppers on the High Street over the period.
The shares traded lower on the figures as many analysts had expected sales growth to be up around four per cent year on year.
Looking to the long term, we expect sales growth to resume when consumers return to the High Street and bearing in mind the group’s plan to have 1,770 stores in the UK by 2010, which we believe is achievable, we see the group as well positioned to continue long term sales and profit growth.