The pharmaceutical sector is likely to see increased growth and profitability in coming years, argues Insync Funds Management.
Earnings growth will be driven by a surge in investment into the 'biosimilar' drug market by large pharmaceutical companies.
“The pharmaceutical sector continues to be underappreciated as the pipeline of new drugs starts to generate stronger revenue and earnings growth along with consolidation in the sector,” said Insync in a statement.
Insync portfolio manager Nitesh Patel said: “Consolidation among the big pharmaceutical companies will lead to a rationalisation of their drug portfolios which should lead to increased free cash flow which for investors and will see increased dividends and a potential re-rating of the sector.”
According to Insync, biosimilars – which are cheaper and highly similar versions of traditional biologic drugs – are not currently sold in the US, but nonetheless remain the largest global drug market.
The value of investing into alternate drug companies is evidenced by Pfizer’s recent acquisition of specialty pharma and biosimilar drug company Hospira.
Pfizer has paid a full price of $US17 billion for Hospira which equates to a PE multiple of 36 times for 2015/2016.
“Pfizer say paying 35 times 2015 earnings for Hospira and that they can make it earnings accretive in the first full year shows how large pharma companies can make deals look attractive despite what some would call a full price for a smaller drug company,” said Insync.
“Insync is expecting drug company earnings growth to accelerate in the coming years as consolidation occurs with reduced competition, cost savings and the pipeline of critical and novel new drugs coming to the market,” said Mr Patel.
“M&A is likely to continue in the sector and we should expect more deals that are earnings enhancing,” he said.