The first age of the pharmaceutical industry ran from the 1960s to the early years of this century. It was the age of the chemical drug. These drugs are chemical compounds, that had been found to have a beneficial effect on the human body and which were synthesized in the laboratory.
Think of paracetamol, Lipitor (atorvastatin) and Viagra (sildenafil). This led to the first boom in the drugs industry, when patent-protected blockbuster medicines made billions of pounds for these firms. Yet recently we have seen a decline in this industry, with a series of key patent expiries, and declining profits as more as more doctors and patients turned to generic medicines.
The second age of pharmaceuticals has begun
But reports of the demise of the pharmaceutical industry have been greatly exaggerated. That’s because we are now at the beginning of the second age of the healthcare sector — the age of biotechnology.
In research laboratories from Oxford and Harvard, to ETH and Stanford, scientists are coming up with new innovations in the biosciences. Papers and patents are being published, spin-out companies created and new products are being devised and launched.
The innovations are coming in many different areas. Genetics and gene sequencing are yielding a huge amount of information about how our bodies function. Stem cell science will lead to the hope that the paralysed will be able to walk again, and that replacement organs can be grown. The science of vaccines means that we are protected from many common diseases. And the development of antibody-based biological drugs means that cancer is a disease that finally can be defeated.
A great time to invest in biotech
In the UK, I think the leader in these new treatments is AstraZeneca (LSE: AZN), a drugs company that has set out its stall to be a world-leading innovator in healthcare. A recent pull back in the share means that, at a 2016 P/E ratio of 13.61, and with a dividend yield of 5.14%, this firm offers good value.
In Switzerland, another pharma company with a similar outlook to AstraZeneca is Roche (NASDAQOTH:RHHBY). It also has substantial strengths in biotech and produces a range of drugs including anti-cancer treatments Avastin and Herceptin. It is a highly acquisitive firm that has taken over many biotech businesses, including Genentech. It is highly rated, with a P/E ratio of 24.06, and a dividend yield of 3.22%, but, to many investors and analysts, it represents as clear a vision as you can get of the future of pharma.
In the US, the leading biotech firm is Amgen (NASDAQ:AMGN). Headquartered in Thousand Oaks, California, you might be surprised to hear that its $116bn valuation makes it worth more than AstraZeneca. Like Roche, it buys up promising spin-out businesses so that it can remain at the cutting edge of this fast-moving industry.
It produces treatments for arthritis, anaemia and osteoporosis. And it is a firm that is steadily growing revenues and earnings. A P/E ratio of 16.92, with a dividend yield of 2.31%, means you can buy into growth at a reasonable price, and the scale of this business means it is nowhere near as risky as taking a punt on a small cap biotech start-up.
