One of the most appealing aspects of investing in the healthcare sector is its hugely defensive properties. Unlike the vast majority of companies, both public and private, health care companies have a relatively low correlation with the performance of the rest of the economy. This means that their results tend to be more stable than many index peers which, for investors, can provide greater certainty and a much better earnings visibility.
Of course, pharmaceutical stocks may not be subject to the same ups and downs of the business cycle as their more cyclical peers. However, they are just as susceptible to the challenges posed by the patent cycle, with the loss of patents causing sales for key, blockbuster drugs to come under severe pressure as generic products are offered at a fraction of the price.
This situation has hurt AstraZeneca’s (LSE: AZN) top and bottom lines in recent years, with it losing a number of patents in recent years and failing to produce sufficient replacements. However, looking ahead, this situation is set to change, with AstraZeneca’s acquisition programme repositioning the company and its pipeline so that it has become a relatively appealing long term investment once more. Evidence of this can be seen in the fact that US rival, Pfizer, made several bids for the company during 2014.
Furthermore, AstraZeneca continues to offer an excellent yield despite its recent woes. In fact, it currently yields a very impressive 4.2%, with dividends having being held steady during the last four years. And, with its bottom line set to deliver positive growth over the medium term, improved investor sentiment could lie ahead.
Clearly, the patent cycle can provide numerous winners. One notable example is Shire (LSE: SHP), which has increased its earnings per share from $1.45 in 2012 to $5.60 in 2014, which is a stunning rate of growth. And, looking ahead, Shire is aiming to double its sales between now and 2020 which, if met, would be likely to considerably boost investor sentiment in the company and push its share price higher even though it has already risen by 268% in the last five years. And, while Shire has a relatively low yield of just 0.3%, it pays out just 7.5% of profit as a dividend. So, in the long run, it could become an enticing income stock, too.
Meanwhile, not all health care stocks offer such promising share price potential. For example, antibody and protein research producer and distributor, Abcam (LSE: ABC), trades on a price to earnings (P/E) ratio of 27.4 and yet is forecast to post an increase in its bottom line of just 4% in the present year, followed by a further 7% rise next year. That puts it on a price to earnings growth (PEG) ratio of 3.7, which indicates that the 45% rise in its share price over the last year may not be replicated over the medium to long term.
