The pharmaceuticals sector has, for many years, been one of the classic growth sectors driven by a growing, ageing population with significant unmet medical need, and better access to healthcare. At the same time advances in medical knowledge and the emergence of new technologies are revolutionising the way medicines are developed, tested, and delivered to patients. From humble beginnings in the apothecaries of Babylon, the global pharmaceutical industry today (prescription and over-the-counter products) generates over one trillion dollars in revenues each year.
Global prescription drug sales ($m) – flatlining?
Source: IQVIA, HSBC
Coming down with something
Over the past decade, however, expectations for future growth have come down significantly. A number of the blockbuster drugs discovered in the early 1990s have lost their patent protection over the past decade, allowing generic alternatives to enter the market at a steep discount. Hence the term “patent cliff”. Meanwhile, the outlook for pricing and volume expansion is becoming less attractive given sustained pressure on drug pricing in Europe, the growing size and bargaining power of health insurers in the United States, and mounting competitive pressure in emerging markets. A tweet from Democratic presidential candidate Hillary Clinton in September 2015 attacking high drug prices thrust the pharmaceutical sector into the political arena, creating additional uncertainty for future earnings that is still palpable today. All things put together, these challenges have led to a sharp rebasing of expectations for the industry.
In need of a check-up
In the JPM UK Equity Growth Fund we look for high quality companies that are exceeding expectations. Despite the headwinds facing the industry from a top down perspective, this year we have been buying UK pharmaceuticals, which we think offer genuine growth opportunities. Both AstraZeneca and GlaxoSmithKline have been surprising positively. For example, GlaxoSmithKline’s new shingles vaccine (Shingrix) generated sales of £110 million in the first quarter, nearly triple analyst estimates of £40 million, taking a 90% market share just five months after launching in the US. Meanwhile, AstraZeneca’s renewed focus on research and development productivity is delivering clear benefits with clinical trial results across the oncology portfolio (Tagrisso, Lynparza, Infimzi) coming in well ahead of market expectations, alongside a return to positive sales growth for the first time since 2010.
The results are back
The Pharmaceuticals & Biotechnology industry group has been one of the best performers in the UK market in 2018, returning 18.8% to 31 October 2018. Despite exceeding expectations, the sector has seen only modest earnings-per-share (EPS) revisions, hence this performance has been driven almost entirely by a re-rating of the sector. The market is currently forecasting +5.4% EPS growth over the next 12 months, below the expected +7.0% growth for the broader UK market. If the strong underlying fundamentals continue as per recent quarters we see scope for EPS upgrades, and further outperformance.
Kyle Williams is a portfolio manager for the JPM UK Equity Growth Fund.
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