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.”

This article is issued by Cazenove Capital which is part of the Schroder Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

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