Healthcare is one of the market’s most defensive sectors. Indeed, as long as humans exist, they will need treatments to prevent and cure diseases, meaning that there will always be a demand for the services of companies like AstraZeneca (LSE: AZN) Shire (LSE: SHP) and Hikma Pharmaceuticals (LSE: HIK).
As an investor, the best thing about owning shares in a large pharmaceutical company is the fact that you don’t have to babysit your investment. Companies like AstraZeneca, Shire and Hikma own the rights to products that will always be in demand, and are spending billions on R&D to ensure that they have a steady stream of new products coming to market.
Take AstraZeneca, for example. The market is concerned about the company’s outlook as some the group’s best-selling products are coming off patent during the next few years. These treatments account for around a fifth of sales, so AstraZeneca has a lot to lose if the company is unable to produce replacement drugs. As a result, for the past ten years AstraZeneca has spent around $5bn per annum on R&D, that’s just under a fifth of revenues. The company now has more than 200 new products under development and City analysts believe that AstraZeneca’s treatment pipeline is robust enough to return the group to growth by 2017. According to analysts, AstraZeneca’s new product sales could top $21bn — 90% of existing sales — by 2022 in a best-case scenario. While investors wait for AstraZeneca’s pipeline to start producing results, the company’s shares yield 4.1% and it’s this hefty yield that’s helped AstraZeneca’s shares provide a total return of 19.3% over the past three years, compared to a return of 6.7% for the wider FTSE 100. AstraZeneca is currently trading at a forward P/E of 16.1.
Shire specialises in the production of treatments for rare diseases and the company is a leader in this highly profitable niche. Shire is currently chasing the acquisition of Baxalta, another specialist in rare disease treatments. If Shire’s management gets Baxalta shareholders to accept the company’s offer, it will create a global leader in rare disease drugs with projected product sales of $20bn by 2020. Further, based on current treatment pipelines, the enlarged group could launch more than 30 new products, with an incremental sales potential of $5bn by 2020. So, if Shire manages to convince Baxalta to sell out, there could be years of profitable growth ahead for the company. Shire is currently trading at a forward P/E of 18.7.
Hikma specialises in the production of generic, low-cost drugs which have lost patent protection and the company is extremely good at this. The company’s earnings per share have expanded 130% since 2010 and City analysts have pencilled in EPS growth of 16% for 2016. Based on this forecast the company is trading at a forward P/E of 23.2. Hikma’s shares only offer a token dividend yield of 0.7%, although the payout is covered five times by earnings per share.
