Pharma & Biotech on the Stock Market
Pharmaceuticals & Biotechnology on the Stock Market
Some strong recent results and innovations have brought the Pharmaceuticals & Biotechnology sector back to our attention. While this sector may be unloved and undervalued, it is still doing good work and may be worth another look from the perspective of the private investor.
The
There are many different companies involved in the fields of pharmaceuticals and biotechnology - it is a massive industry! But for brevity’s sake, we are going to limit ourselves to the 'Pharmaceuticals & Biotechnology Sector’ as defined by the FTSE Industry Classification Benchmark (ICB) and used within the investment industry.
What this means is that we will be excluding some companies that might at first glance seem to be 'pharmaceuticals' but which actually generate the bulk of their business from other activities. For example, those companies distributing medical supplies are classified under the 'Health Care Equipment & Services' sector, high-street chemists are classified as 'Retailers' whilst vitamins are produced by the 'Food Producers' sector.
This sector divides rather obviously into two sub-sectors:
· Pharmaceutical companies develop and manufacture prescription and over-the-counter drugs (aspirin, cold remedies, birth control pills), as well as vaccines.
· Biotechnology companies research and develop biological substances for use in new drugs and diagnostic tools. Most biotech firms sell or license their discoveries to other companies, which then carry out advanced clinical testing before manufacturing and marketing the new products.
Different companies specialise in different phases of the production process although there is no set pattern over which companies do what:
· Pipeline and Test companies - specialise in the highly technical Research & Development phase. Advanced testing is often carried out by another company under licence, prior to obtaining regulatory approval,
· Marketing companies - specialise in taking the new drugs to market,
· 'Full service' and 'Niche' players - will often get involved in all stages from the discovery to the marketing of a drug.
Whatever their focus, many companies are involved in more than one production phase.
Current Market Factors
The advanced research inherent in pharmaceuticals & biotech often puts this sector right at the forefront of modern science and right in the midst of both moral and legal controversy.
· 'Generic drugs' is a phrase used to describe those medicines no longer protected by trademark or patent law - and now described by their scientific names rather than the brand names, e.g. ibuprofen vs Nurofen. The dispute lies between the third world, who want patent law to be further loosened so that they can afford to fight disease in their countries, versus the drug companies who need the revenues in order to fund Research & Development on new drugs.
· Genetic engineering. For all its scientific promise, there is uncertainty as to the potential costs and consequences of genetically modified crops and animals. Our labelling laws reflect this apprehension - further restrictions could follow.
· Animal testing. Under the 1986 Animals (Scientific Procedures) Act, a licence for animal testing is only granted when there is no alternative research technique available and the medical benefits outweigh the costs. Many of the research-based pharma & biotech companies are involved, but the recent case of a guinea pig breeder's dead mother being stolen by animal rights activists shows how divisive vivisection remains.
Small is Beautiful!
Of the 26 pharma & biotech companies currently listed on the LSE Main Market, only 5 form part of the FTSE 350. There are a further 21 'small cap' shares listed on the Main Market - 13 of which form part of the All-Share Index, whilst 8 are so tiny that they are technically listed as 'fledglings'.
The FTSE All-Share Index does not include the Fledgling Index. Hence the 'small cap' sector includes both the All-Share companies outside the FTSE 350 as well as the fledglings.
|
Market |
Capitalisation |
No. of Listings |
|
Main Market |
Large cap shares (FTSE 100) |
3 |
|
|
Mid cap shares (FTSE 250) |
2 |
|
|
Small cap shares (FTSE All-share excl. FTSE 350 + Fledglings) |
21 (13 All-shares + 8 Fledglings) |
|
AIM |
|
59 |
The pharmaceutical and biotech sector is dominated by small, highly specialised, research firms. And many of these companies don't have regular income streams, but are dependent upon new discoveries to fund future research. The very nature of this business makes these companies an interesting investment:
· Success breeds success - any breakthrough discovery or licensing agreement will result in huge revenues which can then be used to fund further research. However, any delays in licensing or achieving partnership agreements can cause cash-flow problems.
· Volatile share price movements - the small size of these businesses often means that trading is irregular and many will be bought and sold as penny shares with relatively large bid/ offer spreads. Price movements can be volatile - although new discoveries can spark explosive share-price growth.
The Pharmaceuticals and Biotechnology Sector Top 10
The two largest companies in the Pharmaceuticals & Biotechnology sector - GlaxoSmithKline (GSK) and AstraZeneca - dwarf their competitors. The disparity is such that the market cap of these two global giants stands at 10x the market cap of all the other companies in this market combined.
|
Top 10 Pharma & Biotech Companies |
Industry Sub-Sector |
Market Cap £mil |
|
GLAXOSMITHKLINE |
Pharmaceuticals |
87,550.38 |
|
ASTRAZENECA |
Pharmaceuticals |
45,831.84 |
|
SHIRE |
Pharmaceuticals |
4,352.60 |
|
HIKMA PHARMACEUTICALS |
Pharmaceuticals |
665.74 |
|
|
Biotechnology |
410.34 |
|
BTG |
Biotechnology |
301.28 |
|
ALIZYME |
Biotechnology |
299.65 |
|
SKYEPHARMA |
Pharmaceuticals |
283.97 |
|
GENUS |
Biotechnology |
267.82 |
|
VERNALIS |
Biotechnology |
253.84 |
Formed from the merger of Glaxo Wellcome and SmithKline Beecham in 2000, GSK now accounts for around 7% of the world pharmaceutical market and is a leader in genomics and new drug discovery technologies. GSK's portfolio of medicines and vaccines includes brands such as the pain reliever Panadol and the Nicorette patch.
GSK's share price rose 3.4% in April on the back of strong quarterly results – with Q1 operating profits up 24% from the previous year to £2.2 billion (news release 27/04/06). The Group also announced an agreement with Cobra Biomanufacturing and the International AIDS Vaccine Initiative to develop and manufacture HIV vaccine candidates for evaluation in clinical trials (news release 02/05/06).
AstraZeneca saw its share price rise 4.5% in April - again in response to better than expected quarterly results, but also in part due to rumours of a takeover approach from GSK. Sales rose 8% to $6.2 billion, whilst operating profits jumped 36% to $2.0 billion - with specific credit given to the schizophrenia drug Seroquel, the ulcer pill Nexium and cholesterol fighter Crestor (news release 27/04/06).
Shire was another pharmaceuticals company posting Q1 results last month. Whilst total revenues were up 23% to $411 million (news release 27/04/06), the results were tempered by sobering news on the patent dispute with generic drug-maker Barr over the flagship product Adderrall XR - which treats ADHD in children. This uncertainty led to a 3.2% drop in the share price in April.
The rise of Hikma Pharmaceuticals - which only listed on the LSE in November 2005 - demonstrates that 'generics', seen as a threat by some companies, can offer opportunities for others. Over 40% of Hikma's revenues come from the sale of generics such as folic acid and lithium carbonate. Hikma's share prices rose an impressive 9.6% in April on the back of its preliminary results for 2005 (news release: 29/03/06).
SkyePharma - a specialist in pipeline and test phase services - saw its share price nosedive following the announcement of a £51 million net loss in 2005 and an 18% fall in turnover to £61.3 million (news release 19/04/06). But the share price rallied to finish 7.9% ahead, when Skye reiterated its belief that it would find a marketer for its asthma treatment Flutiform (news release 20/04/06).
Genus PLC stands out as a specialist among biotech firms, for applying advances in genetics to cattle breeding services. Formed in 1994 after the break-up of the Milk Marketing Board, Genus acquired fellow genetics specialist Sygen last year and also owns Picston Shottle, a world-class Hornstein bull stud.
Pharma & Biotech on AIM
Whilst there are 85 'Pharmaceutical & Biotech' companies listed in
· Henderson Morley stands out among AIM's pharmaceutical firms. Shares in this drug developer have soared 407% this year on the strength of a new herpes vaccine and an undisclosed licensing agreement (news release 03/05/06).
· AorTech International develops and manufactures polymers for use in cardiovascular devices such as heart valves. Its share price has surged 162% this year, following the announcement of a 'licence and supply agreement' with medical device manufacturer St. Jude Medical (news release 21/03/06).
· Osmetech has been another newsworthy AIM firm. Whilst the aroma-based diagnostics company announced the launch of a revolutionary new Cystic Fibrosis Carrier Detection System in March (news release 28/03/06), the share price has dropped 7.4% this year after posting increased operating losses of £5.22 million for the 8 months to 31st December 2005 (news release 21/03/06).
Whilst Osmetech expects 'eSensor' to boost its revenues this story demonstrates that there is little to separate biotechnology companies - and pharmaceutical companies - from profit and loss on AIM!
