This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, the AIC examines which trusts are affected by the M&A activity in the pharma sector.
Investors in pharmaceuticals have been paying close attention to the markets, with share prices at Novartis and GlaxoSmithKline rising following the announcement of an asset swap and merger of consumer health units, as well as a takeover bid of AstraZeneca (AZN) by Pfizer (PFE).
Investment companies across a number of Association of Investment Company (AIC) sectors have significant exposure to global pharmaceuticals, with 19% including at least one of the big pharmaceutical deal companies; Novartis (NOVN), GlaxoSmithKline (GSK), AstraZeneca and Pfizer, in their top ten holdings.
Will These Deals Be Beneficial To Shareholders?
Merchants Trust (MRCH), from the UK Equity Income sector, has 8% of its holdings invested in GlaxoSmithKline. Simon Gergel, manager of Merchants Trust, said: “We welcome the transactions between GlaxoSmithKline and Novartis. Glaxo is consolidating their global leadership positions in vaccines and consumer health, both businesses that benefit from scale advantages, with good growth prospects and with limited risk from generic competition.
“At the same time, they are selling their oncology franchise for a historic sales multiple of close to ten times, which highlights some of the hidden value within the company. Glaxo will also be able to benefit from efficiency gains across these three areas.
“As a general point, these transactions follow a recent trend for greater focus amongst the ‘mega caps’, taking advantage of higher valuations available for selling assets than those reflected in the stock market. Vodafone (VOD) sold their stake in Verizon Wireless at a high price, Glaxo has announced the sale of their oncology franchise to Novartis and BP (BP.) have a number of oil and gas assets.”
Henderson European Focus Trust (HEFT) has 7% of its assets invested in Novartis. John Bennett, Fund Manager, Henderson European Focus Trust, said: “This deal will see Novartis exchange its vaccine treatments for GSK’s oncology products and the creation of a jointly operated over-the-counter consumer healthcare business, with lines in ‘wellness’, oral health, nutrition and skin care. Novartis will also sell its animal health arm to Eli Lilly in a separate transaction.
“We have said for some time that the European pharmaceuticals industry is only partway through what we expect to be perhaps a decade-long renaissance. The agreement between Novartis and GSK has added to speculation around the prospects for further M&A activity in the pharmaceuticals sector. But, beyond the short-term market noise, the trade represents part of an ongoing evolution of the industry as companies strive to improve their financial strength, efficiency, competitiveness and reduce their reliance on ‘blockbuster’ drugs.
“Novartis has been our largest position for some time, reflecting the significant level of conviction we have had in the company’s prospects. We expect this accord to feed through to greater profits over time, due to the high-margin nature of the firm’s cancer business, versus the less profitable operations it will be divesting, in animal health and vaccines.”
Significant Holdings
Polar Capital Global Healthcare Growth & Income (PCGH) has significant holdings across pharmaceuticals, with 7% of assets in Novartis, 7% in GlaxoSmithKline, 6% in AstraZeneca and 5% in Pfizer.
Keystone (KIT), Perpetual Growth & Income (PLI), Edinburgh Investment Trust (EDIN) and Invesco Perpetual Select UK Equity (IVPU), which are all managed by Mark Barnett, have assets invested in these pharmaceutical companies. Keystone has holdings of 3% in both Novartis and GlaxoSmithKline. Invesco Perpetual Select UK Equity has holdings of 4% in Novartis, 3% in GlaxoSmithKline, and 4% in AstraZeneca.
Edinburgh Investment Trust has holdings of 6% in both GlaxoSmithKline and AstraZeneca, while Perpetual Income & Growth has investments of 4% in Novartis, 3% in GlaxoSmithKline and 4% in AstraZeneca.
Morningstar Disclaimer
The views contained herein are those of the author(s) and not necessarily those of Morningstar. If you are interested in Morningstar featuring your content on our website, please email submissions to UKEditorial@morningstar.com.