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Income: pharma and tobacco prove evergreen as others wilt
Markets
by Annabelle Williams on Sep 07, 2011 at 14:03
Pharmaceutical and tobacco stocks have outperformed strongly in recent months as the continuing turbulence in Western economies has driven investors into traditional safe havens.
Over the past six months, GlaxoSmithKline is up 11.22%, British American Tobacco (BAT) up 10.06% and Imperial Tobacco up 2.72% against a fall of -13.27% in the FTSE 100.
For pharmaceuticals firms increasing sophistication of modern medicine alongside aging populations means demand for the products is set to grow and grow – not to mention through the wealth of opportunities in emerging markets.
Ian Lance, fund manager at RWC Partners has his biggest weighting in pharma and replies ‘God no’ when asked if the rally is ending soon. He believes the stocks are currently priced ‘very, very cheap’, attributing the low prices to worries about patent expirations and regulatory issues.
Last week, AstraZeneca received a kick from UK body NICE which refused to approve its breast cancer drug Faslodex for use on the NHS, news which followed a blow the previous week from the US Food & Drug Administration (FDA) which refused to approve Astra’s new diabetes drug Dapagliflozin for sale in the US.
Both refusals mean the loss of millions in future sales, and while the FDA went on to approve Astra’s anti-clotting remedy Brilinta, the stock still saw some large fluctuations over the last few weeks, losing -5.43% in the month to August 30.
Nevertheless, Lance pointed out that Astra as a stock has ‘done nothing for years’, so perhaps now is indeed the stock’s moment, he argues.
Jupiter Growth & Income fund manager Philip Matthews also believes the stock is very good value, adding that the premium investors had to pay for more defensive stocks at the height of the credit crisis has now disappeared.
He singles out GlaxoSmithKline as one pharma stock which is both a good buy and likely to rise further. He said the company looks cheap in absolute terms with shares trading on less than 11x 2012 earnings and yielding over 5%. Analysts have priced growth expectations for the share very cautiously, he said, and any future drug discoveries would mean a real boost to the price.
Meanwhile, tobacco firms continue to profit from growth in emerging markets as the flourishing wealthy classes with rising disposal incomes see smoking as a symbol of decadence.
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- GlaxoSmithKline PLC (GSK.L)
- British American Tobacco PLC (BATS.L)
- Imperial Tobacco Group PLC (IMT.L)
- AstraZeneca PLC (AZN.L)
- Philip Morris International Inc (4I1EUR.Lp)
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