In a note to investors, Martin Currie global healthcare analyst Gavin MacGregor said the “good news” for the sector is that scientific and medical breakthroughs are still aggressively driving innovation.
“The heart of the sector is beating strongly and a steady flow of new drugs should continue to drive material improvements in health outcomes for patients around the world,” Mr MacGregor said.
However, increased scrutiny of costs is an issue for the sector, he said, noting the recent case of Turing Pharmaceuticals which bought the rights to HIV medication Daraprim and immediately raised the price from US$13.50 to £750 per pill.
“Hillary Clinton has made reducing drug costs and curbing pharmaceutical industry abuse a major part of her campaign for the Democrat nomination [for the US presidential election],” Mr MacGregor said.
Martin Currie looks for three defining characteristics in the pharmaceutical and biotechnology companies it invests in, he said.
First, the investment manager looks for innovation and market leaders.
“We look for businesses where we are confident in the management team and R&D process and where the market they lead has strong growth fundamentals,” he said.
Second, Martin Currie seeks out disruptive innovators that have an acceptable risk/reward profile.
“Potential ‘disruptors’ include mature companies, proactively investing externally in multiple areas of disruptive innovation, with defined therapeutic and commercial strategies,” Mr MacGregor said.
“As long-term investors, we are generally supportive of companies where management is willing to take some risk and invest early in innovation cycles,” he said.
Finally, the investment firm looks for underappreciated barriers to entry.
“While the typical pharma business model centres on R&D and innovation, a small number of companies benefit from other barriers to entry, less appreciated by the market, such as manufacturing, distribution and patient services,” Mr MacGregor said.
“We have been interested for some time in the blood plasma market and the products derived from this raw material.
“While innovation and developing new products is still important, the market leaders have built their barriers to entry through blood collection and manufacturing scale and efficiency.
“We believe the market underestimates this (and the sustainability of returns),” he said.
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