Despite the cost-of-living crisis and rising inflation, the pharmaceutical industry has continued to perform well into 2022, while other sectors have struggled.
As a result of the epidemic, the pharmaceutical and biotech industries’ stock prices reached all-time highs.
Investors can capitalize on the rising long-term demand for healthcare solutions due to the sector’s broad exposure.
In recent years, the pharmaceutical business has seen substantial upheaval.
While the Covid vaccinations made headlines, AstraZeneca and GlaxoSmithKline are beginning to reap the benefits of years of study.
With a recession on the horizon, however, will pharmaceutical companies be able to maintain their momentum? And could it be a good time to invest in biotech companies, whose shares have stagnated?
The Covid vaccine has significantly raised AstraZeneca’s global profile, and in February the company reported record quarterly revenues, including $1.8 billion from the Covid vaccine and $39 billion in sales from its acquisition of Alexion. Additionally, its dividend was raised for the first time in a decade.
After doubling its share price in five years, AstraZeneca is now the second largest FTSE 100 company by market capitalization and a popular holding among income funds such as Artemis and Columbia Threadneedle UK Equity Income fund.
This year, AstraZeneca and GlaxoSmithKline, both constituents of the FTSE 100, have performed well despite the broader market decline. Their shares are up 28% and 8%, respectively, year-to-date, according to Garry White, Charles Stanley’s chief investment analyst.
Slowly, Covid-19-related sales are diminishing, but the easing of pandemic restrictions has boosted sales of other vaccines, and sales of cancer drugs have been on the rise – and the major players have robust pipelines of potential new products in development.
GSK has also performed well, with a 32% increase in sales and a 66% increase in operating earnings during the first quarter.
Following the sale of its consumer firm Haleon, which was listed this week on the London Stock Exchange, the company faces a rough road ahead.
The demerger will transform GSK into a pure-play pharmaceutical company. Its consumer healthcare industry was highly predictable and reliable in terms of revenue, and its shares have already plummeted since Halon’s market debut.
While Halon’s first day of trading has been below expectations, it could be a promising investment for those seeking a more stable income.
Chris Beckett, head of equities research at Quilter Cheviot, states, “Given its defensive attributes at a time when volatility is unsettling markets, this is a fundamentally good industry and firm to have exposure to.”
There is no reason why the company’s strong brands and market positions in dental health, pain relief, digestive health, vitamins, and respiratory health cannot be maintained.
How recession-resistant are pharmaceuticals?
In general, investor demand for safer and more defensive companies has remained surprisingly resilient despite the economic slump, as these stocks are viewed as safer and more protective.
Ailsa Craig, co-lead investment manager of International Biotechnology Trust, explains, “During a recession, customers typically prioritize food and healthcare, and the demand for medical therapies does not decline.” The population of persons over 65 who are most likely to require medical care will double over the next decade.
‘Therefore, while insurance coverage may be slightly reduced, resulting in some price pressure, particularly for non-essential treatments, overall pharmaceutical industry sales, particularly for products that treat critical conditions, are unlikely to be significantly impacted by a slowdown in economic growth.’
Historically, healthcare conglomerates were a collection of diverse enterprises, including consumer health, pharmaceuticals, animal health, and in some cases medical device businesses.
‘It is commonly believed that diversification will result in a more defensive portfolio. Consumer health is defensive… medicines may appear defensive, but you must acquire more items since exclusivity is lost. There are more peaks and valleys, according to Killick’s senior stock analyst, Andrew Duncan.
How do investors determine the best investments?
Duncan states, “An investor should seek a company with strong research and development (R&D), a strong pipeline, and a history of delivering that pipeline.” You must have several eggs in your basket.
We evaluate the general direction of travel and seek to invest in companies that provide the R&D sector. The field of biological sciences and tools… There is a demand for services, but we are not dependent on the success of a single product or study.’
Thermofisher, a US-listed company that specializes in scientific research and recently bought a clinical trials firm, is among the companies that stand to benefit from this demand.
Is now a suitable moment to purchase volatile biotech stocks?
At the interface of pharma and technology, biotech companies also benefited from the vaccine bounce.
Since rising in 2020, biotech firm shares have fallen due to the movement away from growth stocks. The Nasdaq Biotechnology index has experienced three years of volatility, with a peak in 2021 followed by a protracted decline.
Craig explains, “This overshooting and subsequent performance correction is typical of the biotechnology industry, but the overall trajectory has been favorable over the past three years, outperforming the UK FTSE 100.”
International Biotechnology Trust is uncommon among growth-focused investment trusts in that it pays a large dividend yielding 5.01 percent currently.
The bulk of the companies owned by the trust already has FDA-approved medicine on the market. Included among these are Horizon Therapeutics, Incite, and Neurocrine.
Even though biotech is an interesting area for investors, it is inherently risky, and investors who purchase individual stocks are exposed to substantial volatility.
White states, “The current issue for companies operating at the forefront of biotechnology is that, similar to research and development in more traditional technology sectors, these businesses require a substantial amount of up-front investment to compete their R&D.”
Even if their product revenues are substantial, it is unlikely that they will materialize for many years. Everything is “jam tomorrow.”
“Such a business relies on borrowing, and higher borrowing costs today translate to a lower realized profit in the long run.”
The amount of interest they will now be required to pay has a direct effect on the valuation of these businesses in the models of City analysts. As interest payments increase, future profit projections and price targets are reduced.
Oxford Nanopore, once the darling of the biotechnology industry, has certainly suffered since its debut on the market a year ago. It is down 32% since its initial public offering and 56% year-to-date.
Due to costs associated with its IPO and share-based payments, the company’s annual losses increased by over £100 million in March. In addition, the termination of a contract with the Department of Health and Social Care to provide rapid Covid tests was detrimental.
White continues, ‘The future of the healthcare industry is without a doubt bright, with exciting advancements in fields such as mRNA-based vaccines, gene therapy, and monoclonal antibodies.
‘However, the mood towards the biotech industry is cyclical, and structural pressure on the sector’s more innovative end remains strong.
‘Rising interest rates, inflation, and geopolitical unpredictability contribute to the pessimistic sentiment surrounding these assets, which are long-duration, risky assets due to the length of time required to achieve profitability.
Negative factors that will cloud the outlook for the sector will persist for some time. With its diverse product portfolio and multiple revenue streams, Big Pharma is likely to remain investors’ preferred way to play the sector for quite some time. Currently, safety is important.’
