Can drug stocks cure a bad case of bear marketitis? – courtesy of Talvest Fund Management

An ounce of prevention might be worth a pound of cure, but don’t tell that to pharmaceutical sector investors. Now that this group is beginning to recover from a steady string of market declines in the first half of the year, investors are eager to scoop up bargains.

Why the change in sentiment? It all comes down to some very encouraging fundamental developments:

• Reduced threat of price controls and/or increased regulation (given Republican Party control of Congress)
• Prospect of a pickup in drug and/or therapy approvals (due to new FDA leadership)
• Increased industry consolidation (fuelled by patent expiration)
• Possibility of a stronger, fuller drug pipeline in 2003
• Relatively attractive valuations
• Superior dividend yields

Coupled with top-line growth of 6% to 8% annually and healthy bottom-line free cash flow, these fundamentals make pharmaceutical companies more interesting to investors today than any other time over the past year.

In the long term, the pharmaceutical sector, which includes manufacturers and distributors of pharmaceutical products, also remains an attractive investment opportunity due to ongoing global trends:

• Increasing demand for better health care and access to sophisticated drugs
• The world’s increasing over-65 population
• Technological advancements

This doesn’t mean that the pharmaceutical group is a sure bet. There are some issues that suggest continued underperformance in the short term:

• Loss of patent protection on some key drugs
• Increased competition from generics
• Slower revenue growth
• Impact of changing technology on “super drugs”
• The hot-button issue of high drug costs

Some of the stocks that fall into this group include the following: Abbott Labs, Aeterna Laboratories, Amgen, American Home Products, Angiotech Pharmaceuticals, AstraZeneca, Aventis, Axcan Pharma, Biovail, Bristol-Myers Squibb, Eli Lilly, Forest Labs, GlaxoSmithKline, ICN Pharmaceuticals, INEX Pharmaceuticals, Johnson & Johnson, King Pharmaceuticals, Merck, Mylan Labs, Novartis AG, Pharmicia, Pfizer, Roche Group, Schering Plough, Teva Pharmaceuticals and Watson Pharmaceuticals.

November 2002

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.