March 27, 2008Financial Times (FT.Com)
The market's attitude towards the pharmaceutical industry has changed dramatically over the last decade. The rise of generics, perceived pipeline issues and pricing have all led to a major de-rating of these stocks. This presents a huge opportunity," says Jamie Seaton, fund manager at SVG Investment Managers.
The sector is on a 15 year high free cash flow yield and companies within it are changing their attitude towards capital returns to shareholders with increased dividends and more share buybacks, he says.
GlaxoSmithKline, for example, yields more than 5 per cent and is buying back more than 10 per cent of its share capital in 2008 as part of a GBP12bn scheme.
"Underlying factors fully support the industry. The pipeline for drug approval in 2008 is strong - there are $12bn of new drugs awaiting approval in 2008 versus a three year average of $11bn, and the sector is forecast to grow its earnings per share 9.3 per cent per annum until 2012 via top-line and cost cutting initiatives, with the latter as yet largely unexploited."
The industry is also supported by favourable demographics, global growth and wealth creation. The latter is leading to improved healthcare in emerging economies and gives pharma groups an opportunity to expand into relatively untapped markets.
"Pharmaceuticals remain a long-term growth story regardless of the macro environment. Current sentiment merely provides an opportune time to buy."