April 8, 2016 6:15 a.m. ET
You can’t put a price on good health. Investors this year might feel they’ve just got stuck with a bad price instead.
After a long selloff, forward price/earnings multiples for global pharmaceuticals companies have dipped to levels last seen around the end of 2013. That was when the industry was just emerging from what is known as the patent cliff; when a pickup in research and development productivity was much-debated but hardly a certainty.
Admittedly, enthusiasm for the sector did runneth over in the first-half of last year. But the subsequent slump owes more to politics than pipelines, argue European analysts at Bank of America Merrill Lynch. Political rhetoric, started by Hillary Clinton’s comments on drug prices in September, has weighed on the sector, despite a widespread belief that proposals like direct government price negotiation are unlikely to become a reality after November’s election—regardless of who wins.
This chimed with concerns that the heft and influence of pharmacy-benefits managers such as Express Scripts, who have already made their presence felt in areas like diabetes, respiratory and hepatitis C by playing rivals drugs off against each other.
The result, says BAML, is a European sector trading too cheaply, even as three-year annual growth in earnings per share reaches 11%. The sector is back to its long-term average price/earnings premium, despite a weaker equity market and economic backdrop that would usually benefit dependable industries like pharma.
Before investors pile in, there is a catch—especially in Europe. The end of last year and beginning of this brought with it a round of disappointing news for those awaiting the long-promised acceleration in pharmaceutical earnings growth. Sanofi downgraded its outlook, guiding to flat near-term growth. Novartis is struggling with problems at its eye-care unit Alcon, while new drug launches at both companies have fallen short of (admittedly high) expectations.
The picture wasn’t much better elsewhere. Usually dependable Roche caused some confusion over its outlook, related to foreign exchange, prompting downgrades. AstraZeneca faces what is charitably called a transition year, awaiting key pipeline data on its oncology drugs in 2017. Meanwhile, GlaxoSmithKline, which should deliver double-digit growth this year as it finds cost savings following its asset swap deal with Novartis, is still trying to convince investors of the merits of its early-stage pipeline with data not expected until next year.
In fact, a slightly quiet year for pipeline readouts and other development catalysts generally means limited potential to drown out political cage-rattling in the U.S.
That doesn’t mean that the election doesn’t present an opportunity, as concerns lift. And by then, other issues should also be clearer, as companies tackle internal problems, address stagnating launches, or approach key data. The sector may be looking cheap but there doesn’t seem much need to rush.
Write to Helen Thomas at [email protected]