The pharmaceuticals industry is a paradox when it comes to environmental, social and governance investing. One might think that helping to cure the sick would put it top of the list for ethical funds. Yet Michael Canfield, a portfolio manager at Man GLG, says that responsible investors have to think twice about an industry “beset by perverse incentives, graft, absurdly skewed priorities and vast wastage”.
The coronavirus pandemic could change all that. The Economist has compared the rapid development of several Covid-19 vaccines to the mass production of penicillin during the Second World War, which restored the reputation of an unloved industry. How the drugs companies with viable vaccines operate could prove to be decisive: with so much money in ethical funds, a company that can demonstrate it is behaving better than its rivals stands to benefit.
AstraZeneca
A year ago AstraZeneca had no vaccine business to speak of. Having struck a deal with the University of Oxford in last April, it has developed a Covid-19 jab that has been approved in more than 70 countries and has produced almost 190 million doses of it to be distributed worldwide, according to Airfinity, a data provider.
Astra’s vaccine can be kept in a normal refrigerator, making it easy to transport and suited for use in developing countries. Significantly, it is providing the vaccine at no profit for the duration of the pandemic and will continue to sell it at cost price in perpetuity for low and middle-income countries.
Many would argue that this is the only way that the company could proceed, as it received hundreds of millions of dollars in public money to fast-track development. So did Moderna and Pfizer, yet they said that they could produce their vaccines only on a for-profit basis. Pfizer expects its version to contribute at least $15 billion to sales this year, while Moderna is forecasting sales of $18.4 billion from its Covid shot.
Despite this, AstraZeneca has received relentlessly negative press for its development. So far, this appears to be largely unfounded. The vaccine is seen as a British product and has become something of a punching bag for European politicians. In the long term, sentiment is likely to shift and Astra’s reputation may yet be burnished by its decisive role in tackling the coronavirus pandemic.
Somewhat remarkably, in the middle of this vaccine effort, AstraZeneca managed to complete a big acquisition that could prove significant to its future health as a company. In December it paid $39 billion to buy Alexion, an American biotechnology company. Alexion generates a huge amount of cash, which will help Astra to fund its very productive but cash-hungry research and development business.
The deal also gives Astra access to the fast-growing market for treating rare diseases. Alexion is developing treatments using so-called complement biology — a new way of making the immune system better at fighting off disease — that the British company says eventually could transform its medicines pipeline.
The present portfolio is strong, with eight blockbusters, or drugs that deliver well over $1 billion a year. Michael Leuchten, an analyst at UBS, expects earnings per share to grow by 12 per cent a year over the next five years, double the rate of the rest of the sector.
The shares have been hammered amid the vaccine fallout and are changing hands for about £71, 19 times or so forecast earnings for this year, with a 3 per cent dividend yield. Rapid earnings growth, as well as a possible reputational bounce, make them an attractive investment for the long term.
ADVICE Buy
WHY Rapid growth at a cheap price
IMPACT Vaccinating the world at zero profit
Hikma Pharmaceuticals
Hikma Pharmaceuticals is in the generics business, making branded drugs more cheaply once they are no longer under patent protection. By its very nature, it improves access to drugs and healthcare, making it a solid prospect from an impact investing point of view.
It, too, has a coronavirus story, in that it is making remdesivir — one of the drugs demonstrated to help patients recover more quickly from Covid — and a number of the medicines most used in intensive care units during the pandemic. Hikma produces more than 90 per cent of the American supply of dexamethasone, for example, which has improved survival rates for those that get sickest from the virus.
A much bigger deal for Hikma is the expected launch of its generic version of Advair, a treatment for asthma and chronic obstructive pulmonary disease. As an inhaled drug, this is trickier to make than many generics, which means fewer competitors and higher margins. The launch was delayed at the beginning of the year, which has weighed on Hikma’s share price, but there are hopes that it could come out by June.
One potential ESG risk for Hikma is that it has been named in litigation related to the opioid epidemic in the United States. Drugs companies have been accused of fuelling the opioid crisis by aggressively marketing their treatments and downplaying addiction and overdose risks. Hikma makes opioids that are used only in hospitals and does not market or sell them directly to doctors. It said at its full-year results that it did not believe there was sufficient evidence against it and that it had not put money aside against potential liabilities related to the cases.
Management attempts to temper analysts’ earnings forecasts in February caused a drop in its share price, which is about £24. Stifel, the broker, says that is 17 times forecast earnings for this year, which is 21 per cent cheaper than its UK-listed peers in speciality pharmaceuticals. The company’s tendency to give cautious guidance and then beat its forecasts makes it appealing at that price.
ADVICE Buy
WHY There’s good business in making hard to reproduce generics
IMPACT Making drugs cheaper for everyone
