Snapshot - Strategy & economics

Dom & Graham’s themes and trends: big pharma

Informal discussions about the key themes changing the world of investment – and the world. This month Dom and Graham ask why, of all the defensive sectors, healthcare is so undervalued.

14/10/2019

Dominic Liversedge

Dominic Liversedge

Portfolio Director

Graham Harrington

Graham Harrington

Portfolio Director

What’s up with healthcare? Of all the defensive industries it looks decidedly unloved.

It’s on a forward P/E of 15.2 compared, for example, to consumer staples’ P/E of 19.

The short answer is that healthcare is a political football. And in the run-up to a US election, markets are putting the boot in.

Investors are spooked in particular by outspoken politicians such as Senator Elizabeth Warren, who talk of capping drug prices and abolishing private health insurance.

In taking a dim view of the sector, markets are replaying exactly what happened in the run-up to the 2016 election, Dom and Graham explain. “And if you’re prepared ignore the noise, you might find opportunities.”

Longer-term trends favouring the pharmaceutical industry

Current valuations might be appealing, but there is also a bigger picture which looks attractive. This is the role played by technology in streamlining the process from early-stage research to approved drugs on sale.

“In the 1990s there was a random process of drug discovery," Graham explains. "You chucked a plate of spaghetti at the wall and hoped something stuck.

“Today companies can identify genetic mutations and screen data rapidly enough to pinpoint solutions. The ratio of R&D to drugs approved is improving – and that means better earnings.”

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