The pharmaceuticals sector has some truly great profit potential.
In our continuing look at the sectors that make up the UK stock market, we turn today to the fourth largest sector, Pharmaceuticals & Biotechnology, which accounts for 7.6% of the value of the FTSE All-Share index.
£50m And Up
The pharmaceuticals and biotechnology industries cover quite a range of companies, with the sector being dominated by Britain's big two -- GlaxoSmithKline and AstraZeneca, which dwarf the rest. All the other companies in the sector are tiny by comparison. The table below includes all companies from the FTSE main list and from AIM with a market cap of at least £50m.
The turnover for each company is taken from its last reported year-end, with the year shown, and where appropriate (a handful, including AstraZeneca, report in US dollars), is converted at a rate of £1 = $1.50.
| Company | Index | Market cap
(£m) | Turnover
(£m) | Year End |
|---|
| GlaxoSmithKline (LSE: GSK) | FTSE-100 | 64,530 | 28,368 | Dec 2009 |
| AstraZeneca (LSE: AZN) | FTSE-100 | 42,428 | 21,869 | Dec 2009 |
| Shire (LSE: SHP) | FTSE-100 | 8,139 | 2,005 | Dec 2009 |
| Hikma Pharmaceuticals (LSE: HIK) | FTSE-250 | 1,134 | 387 | Dec 2008 |
| BTG (LSE: BGC) | FTSE-250 | 469 | 84 | Mar 2009 |
| Genus (LSE: GNS) | FTSE-250 | 405 | 280 | Jun 2009 |
| Dechra Pharmaceuticals (LSE: DPH) | FTSE-250 | 294 | 350 | Jun 2009 |
| Antisoma (LSE: ASM) | Small Cap | 207 | 25 | Jun 2009 |
| Axis-Shield (LSE: ASD) | Small Cap | 197 | 85 | Dec 2008 |
| ProStrakan (LSE: PSK) | Small Cap | 197 | 56 | Dec 2008 |
| Vectura Group (LSE: VEC) | Small Cap | 194 | 31 | Mar 2009 |
| GW Pharmaceuticals (LSE: GWP) | AIM | 130 | 24 | Sep 2009 |
| Alliance Pharma (LSE: APH) | AIM | 76 | 22 | Dec 2008 |
| Vernalis (LSE: VER) | Fledgling | 73 | 55 | Dec 2008 |
| Immupharma (LSE: IMM) | AIM | 73 | 0.06 | Dec 2008 |
| Eco Animal Health Group (LSE: EAH) | AIM | 72 | 19 | Mar 2009 |
| Proximagen Neuroscience (LSE: PRX) | AIM | 62 | 0.3 | Nov 2008 |
| Oxford Biomedica (LSE: OXB) | Small Cap | 60 | 19 | Dec 2009 |
| Renovo Group (LSE: RNVO) | Small Cap | 51 | 5 | Sep 2009 |
The Big Two
With the average cost of developing a new mainstream drug and bringing it to market estimated at being anywhere between $500m and $2bn (including the costs of all the failed candidates), such an enterprise can only realistically be undertaken by a very large company, and the commercial pressures have forced consolidation in the industry in recent decades.
Thus GlaxoSmithKline was formed in 2000 from the merger of Glaxo Wellcome and SmithKline Beecham, which in turn were the results of mergers of their own – Glaxo and Wellcome in 1995, and SmithKlineBeckman and Beecham in 1989, respectively.
Similarly, AstraZeneca was created in 1999 from the merger of the Swedish giant Astra AB with the UK's Zeneca Group (with Zeneca having previously been a part of ICI before being spun off in 1993).
Looking at the two from an investment perspective, GlaxoSmithKline is on a prospective P/E for the year 2010 of just over 10, with AstraZeneca on a P/E of under 8, and both companies are expected to deliver a dividend yield of over 5% this year. With people in the developed world living ever longer, and the economies of the Far East growing fast, the demand for drug sales and development is not going to slow any time soon. Both of these look to me like great blue-chip shares to stash away for a few decades.
Smaller researchers
At the other end of the scale, we have a larger number of smaller research companies, which will often target their efforts at the earlier stages of drug development and trials, winnowing out failures, and hoping to sell on the rights to the big players for them to carry out the expensive later stages of clinical trials and regulatory compliance that account for a large chunk of the total costs.
An example of that is the small research company Immupharma, which turned over practically nothing in 2008. But in early 2009, after successful trials of its drug Lupuzor, for the treatment of the auto-immune disease Systemic Lupus Erythematosus, the company licensed the worldwide rights to US-based Cephalon for $30m, providing a nice boost to its share price.
Classic investment ratios are generally of little use for companies like this -- Immuopharma, for example, is expected to show a nice profit for 2009, but then record a loss in 2010 as it returns to net investment in new research.
Biotechnology
As well as the development of drugs, the sector covers other areas of related technological development, and includes companies like Axis-Shield, which develops laboratory diagnostic procedures for various medical conditions, including cardiovascular disease and rheumatoid arthritis (with new developments being released in the latter field in recent months).
Perhaps unsurprisingly, Axis-Shield shares are more speculatively valued than the big drug developers, with the current price putting them on a forward P/E of around 20. But estimates for 2009 suggest an 80% growth in EPS, with a further 60% forecast for 2010, so classic growth investors might be attracted to this kind of company.
Summary
The Pharmaceuticals & Biotechnology sector really does seem to have something for everyone, covering all sorts of investing styles from blue-chip income shares to blue-sky research.
For my money, I think every well-diversified long-term portfolio should have one of the big two in it.
Previous Sector Analyses
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