Investors in pharmaceutical companies should prepare for a ‘golden age’
The manager of Rathbone Global Opportunities fund, James Thompson has for the first time in ten years begun to invest in pharmaceutical companies. Thompson believe that the investment case in pharmaceutical companies has changed dramatically.
James Thompson’s personal fund was among the top 25 percent of all funds in the IMA global sector in 2013. Thompson thoughts are that pharmaceutical companies are exiting a downturn where profit has been lost for the past decade and that the industry is about to enter a golden age where profits will grow.
The change is due US regulators in the 1990s saw a lot of new products fail, with the consequence that very few new products were actually getting approved. Thomson feels that the at the turn of the century many companies didn’t have new products to replace those that were exiting patent and product lines were becoming less profitable.
He elucidated, ‘Year-on-year, the pharmaceutical industry lost patent protection on some of its largest and most profitable drugs. This culminated in the patent cliff of 2012, the worst year in history for the industry, where seven of the world’s nine largest pharmaceutical companies lost their biggest or most profitable drugs to generic competition.’
The result was a ‘lost decade’ for the sector. In the 1980s and 90s the pharmaceutical industry experienced average annual growth of 12 percent; throughout the last decade this slowed to around 3 percent
However the investment case for pharmaceutical companies has changed dramatically, with breakthrough drugs approaching approval. Drugs where there is no existing substitute and treatments for rare diseases are all becoming factor that command pricing power.
Thompson stated that, ‘It started with the mapping of the human genome – up until then, only 50 percent of proteins and genes were mapped and understood, which means that 50 percent of the market for new treatments was unknown.
We are currently in an age of genetically tailored drug treatments are the norm. With a new wave of innovative and ground breaking treatments and drugs to be approved by the FDA. With the hope that these new drugs will cure conditions such as hepatitis C, lower the number of deaths caused by strokes, give better treatment to people that suffer from type II diabetes and improve immune oncology.
There is huge potential for for one the biggest drug approvals in history, we could possibly see the first drug that dramatically slows down the progression of Alzheimer’s which is all the more significant in breakthroughs as brain diseases are some of the greatest areas of unmet medical need.
This combined with a long list of pipeline drugs awaiting approval mean that we are going to see accelerated growth until at least 2017.
This should lead to a ‘golden age’ for investors in pharmaceutical companies, argued Thomson.
The two pharmaceutical companies that he has recently bought for his £430 million fund are Gilead Sciences and Amgen. At present, pharmaceutical companies comprise around 3 percent of the capital deployed in the fund, but Thomson believes that this could rise to 10 percent with time.
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