Smoke and mirrors
Some interesting and, to the value investor, instructive parallels can be drawn between the pharmaceutical sector today and tobacco companies 15 years or so ago. Back then, investors looked at tobacco and saw companies that were overshadowed by litigation issues – not to mention killing their clients, which is not an obvious route to commercial success. Investors saw them as low-growth or no-growth businesses that were going nowhere and concluded they should not own them.
But they missed all the investment positives. For example, because smoking is so addictive, tobacco companies have enormous pricing power and can increase their prices every year. In addition, these were actually well-run businesses with attractive dynamics and sensible amounts of debt and, as it happened, the litigation threats turned out to have been overplayed. Best and most important of all, the price you were being asked to pay for these stocks was extremely low. In the decade that followed, tobacco companies did phenomenally well.
Fast forward to 2011 and the pharmaceutical sector is despised because of concerns about, for example, large amounts of revenue being lost when drugs go off-patent or, again, potential litigation. But people are missing all the glass-half-full arguments, such as that, in stark contrast to cigarettes, pharma companies actually cure people and, in a world of growing and ageing populations, it is not as if there is a lack of demand for that.
Furthermore, there is an even greater demand in developed markets because their populations are able to pay for drugs. So, while there are of course threats, there are also enormous opportunities and yet, as with tobacco in the 1990's, today you can buy pharma businesses at extremely low prices. Investors looked at tobacco 15 years ago, agreed they were cheap but then shrugged and put their money into other sectors. Today, people are thinking similarly about pharmaceuticals.
Fund Manager, Equity Value
I joined Schroders in 2001, initially working as part of the Pan European research team providing insight and analysis on a broad range of sectors from Transport and Aerospace to Mining and Chemicals. In 2006, Kevin Murphy and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Kevin and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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