UK pharmaceutical stocks remain undervalued despite Democratic nominee Hilary Clinton losing the US election earlier this month.
Pharma stocks have lost value since the beginning of the year as sentiment towards the sector turned sour as then-favourite Presidential candidate Clinton promised to fight drug price hikes in her election campaign.
While the threat of Clinton’s plan to have the government control drug prices has been eliminated following Donald Trump’s victory, pharma stocks are still trading lower than their fair estimate valued, according to Morningstar equity analysts.
Three major UK-listed biopharmaceutical companies AstraZeneca (AZN), Hikma Pharmaceuticals (HIK) and GlaxoSmithKline (GSK) have four-star ratings, meaning Morningstar equity analysts believe that they are trading below their fair estimate share price values.
AstraZeneca and Hikma Pharmaceuticals are down 8.8% and 27% year to date, while GlaxoSmithKline is up 12% year to date. These three stocks rose in value on November 9 when the US election outcome was revealed, however the share prices then fell from the following day onwards.
GlaxoSmithKline is down 3.7% after the outcome of the US election on November 9, while Hikma and AstraZeneca drop 4.8% and 8% respectively after day of the election outcome.
Would a Repeal of Obamacare Affect Healthcare Stocks?
Damien Conover, director of healthcare equity research and equity strategy at Morningstar said a President-elect Donald Trump combined with the Republicans retaining majorities in Congress lead to greater uncertainty for healthcare stocks.
“While Trump and the Republicans have been clear on the desire to repeal the Affordable Care Act, also called the Obamacare, there is less clarity on their healthcare policies, except for the focus on reducing regulations,” said Conover.
“We suspect the likely outcome of the repeal will be more of a modification than a complete repeal as several groups have benefited from the legislation. If the Obamacare were repealed, the outcome will likely mean a lower demand for healthcare combined with less industry fees and profit restrictions, “said Conover.
Ketan Patel, fund manager at EdenTree Investment Management echoes Conover’s views, saying that it is highly unlikely that Trump will scrap the Affordable Care Act, as it will lead to greater uncertainty in the short to medium term, particularly as the President-elect has not presented a cogent alternative.
“The President-elect is faced with an electorate that is not only ageing rapidly, but also increasing suffering from chronic conditions brought on by lifestyle choices. All of this adds up to an increasing future liability which will have to be financed from a federal budget that is already under considerable strain,” said Patel.
“Any amendment or repeal of Obamacare will bring drug pricing into the crosshairs of policymakers,” said Patel.
Daniel Mahony, fund manager of the Polar Capital Healthcare fund pitched in, adding it seems the Republicans will look to use the private sector to help deliver on this plan. This may be done through pushing responsibility down onto the States and then using insurers who specialise in Medicaid managed care to deliver.
“This could be bad for healthcare service providers if patient volumes decrease,” said Mahony. But Mahony added that Republicans are very supportive of innovation across the healthcare sector which could be long term beneficiaries to the biotechnology industry.
Three Undervalued UK-listed Pharma Stocks
America is the primary market for the pharmaceutical and biotechnology industry. The US spends more than 17% of GDP on healthcare, the highest in the world compared to 8-9% in rest of the developed markets, said Edentree’s Patel. Hence the global market is closely impacted by the US healthcare policy and it is relevant to the UK pharma investors of what is happening in the US.
Being on the of the largest companies by market capitalisation in the pharmaceutical industry, GlaxoSmithKline has shifted from its historical strategies of targeting slight enhancements toward true innovation, according to Morningstar’s Conover. Benefits of this strategy are showing up in Glaxo's early-stage drugs. Therefore analysts expect this focus will improve both approval rates and pricing power of the company.
In September 2016, Glaxo appointed Emma Walmsley to succeed Andrew Witty as CEO, which likely supports a continuity of the company's strategy of executing as a diversified healthcare company.
Another UK-listed pharma manufacturer Hikma is one the world's largest manufacturers of generic injectable drugs by volume. Injectables are a subsegment of the generic drug industry that enjoys high barriers to entry, said Morningstar equity analyst Kelsey Tsai.
Meanwhile, AstraZeneca holds a strong pipeline that should return the company to growth in 2018 despite facing a major wall of patent losses, Conover said. While AstraZeneca doesn't have the largest presence in emerging markets, the company is significantly growing in these areas, which should help mitigate patent losses in developed markets.
