Category Investments

RE:CM finds value in pharmaceutical and healthcare companies

02 August 2011 RE:CM:

The share prices of global pharmaceutical and healthcare companies have underperformed significantly since 2000. These businesses do, however, present good opportunities for investors looking to achieve long-term capital growth by investing in shares that are trading at historically low multiples.

This is the opinion of the RE:CM investment team, a value based asset manager. Daniel Malan, Investment Director of RE:CM, says that the market is disillusioned with this industry because there appears to be a consensus opinion that the product pipeline has dried up and companies like this are not generating enough new products in order to offer value. In short, they are considered ex-growth.

Malan says that RE:CM disagrees with the negative market sentiment regarding these businesses, pointing out that these companies have their own rapidly growing generics businesses and the global industry is consolidating.

RE:CM is currently invested in a basket of 15 leading pharmaceutical companies as well as other healthcare industry businesses such as top fund holding Johnson & Johnson, Zimmer and Amgen, as it believes that these companies are cheap relative to their intrinsic values.

He says that these companies have all significantly underperformed world markets since 2000 and as a group, currently trade on a free cash flow yield of 12% and a trailing dividend yield of just over 4%.

“Considering that these 15 pharmaceutical companies account for more than 75% of the global industry’s total annual spend on research and development (R&D) of new pharmaceutical drugs, sooner or later this R&D tends to pay off.”

He goes on to say that in an ageing world that is becoming more and more densely populated, with rapidly rising standards of living in regions with large populations, healthcare in general and specifically pharmaceutical drug development will continue to play a critical role. “If the collective global pharmaceutical industry turned off the taps on drug R&D because it becomes uneconomic to spend the capital, there would in time be no patents to come off patent for the generics manufacturers to copy.”

He compares the situation to tobacco companies, which ten years ago were considered to have no future. “An investor who invested in global tobacco businesses a decade ago would’ve received an excellent return, because they would have paid a very low price for the shares in that particular industry. At the time it was the general belief that tobacco businesses could not grow anymore.

“These same pharmaceutical companies, that were considered to be the market darlings 11 years ago, are now generally considered dogs. The prevailing negative sentiment provides our clients with a sensible investment opportunity in this industry” concludes Malan.

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