4 years on from COVID-19 – what’s happened to the pharma industry?

Investments rise and fall in value, so investors could make a loss.

The pharmaceutical industry has seen a whirlwind of change since the UK’s first COVID-19 lockdown four years ago. After the vaccine race, new key areas emerged, like cancer treatments, HIV, diabetes, and weight-management medicine.

Novo Nordisk, the Danish pharmaceutical giant set the world – and stock market – alight with its weight-loss treatments, like Wegovy, which saw a more than four-fold increase in sales last year. Meanwhile, GlaxoSmithKline had four major product approvals in 2023, including shingles treatments, and HIV.

John Bailer from BNY Mellon told the Switch your money on podcast he felt the benefit of weight-management drugs had been priced in, adding:

“We think these companies are pricing in a 4% perpetual growth rate after you get to that $90bn, and we just think that’s too high.”

Looking further out, cancer drugs are seen as a growth area. AstraZeneca, has a strong position in speciality medicines and treatments for rare diseases. While coming up with these kinds of treatments can be more technically challenging, the resulting products are that much more attractive for it.

This article isn’t personal advice. If you’re not sure an investment is right for you, ask for advice. Investments rise and fall in value, so you could get back less than you invest. Past performance isn’t a guide to the future.

What are the challenges for pharmaceuticals?

There are headwinds for the sector, including finding the right talent for the industry.

Tim Tyson from TriRx, a development and manufacturing organisation for the pharmaceutical industry told the podcast:

“The pandemic created a lot of problems and challenges from people and availability of resources and highly competent, skilled, motivated talent is key in our industry.”

There’s also major competition, as more scientific development means more available treatments, and companies going head-to-head for sales.

Costs are still a challenge. Inflation, interest rates, tax regimes in some parts of the world and an environment of increasing threats is raising the cost of doing business.

The biggest market in the world for drugs is the US – and here, for the first time, the Inflation Reduction Act is letting Medicare negotiate drug prices. This could make a big difference to prices in therapeutic areas.

Tyson added:

“The biggest challenge is the cost of medicine on a global basis. It is a major pressure and so balancing the cost of research and development in bringing medicines to the marketplace and have the appropriate governments and people to pay for those medicines is a challenge.”

Bailer added:

“The political environment is very important, especially for the pharma stocks in the United States. Going into this presidential election, Biden and Trump are very populist, so we do think there is a little bit of risk in terms of drug price negotiation, but the likelihood of a divided government is very high, so there isn’t much that gets done in a divided government.”

Podcast transcript

Susannah Streeter: Hello and welcome to Switch Your Money On from Hargreaves Lansdown. I’m Susannah Streeter – I’m Head of Money and Markets.

Sarah Coles: And I’m Sarah Coles – Head of Personal Finance.

Susannah Streeter: And it is a wonder that we’re both in the study at the moment, with a wave of coughs and colds doing the rounds. It’s been weeks since everyone in my house has been well at the same time.

Sarah Coles: Yes – and our health more generally has been increasingly up for debate in the office, as we’ve been discussing the effects of ill-health on people’s ability to work and the implications this has for everything, from our financial resilience to our pensions.

Susannah: Absolutely. Our health affects every area of our lives, but it also has an impact on companies in the Health space. So, four years on from the first UK lockdown, we thought it would be an interesting time to look at the pharmaceutical sector – in an episode we’re calling ‘In Sickness and in Wealth.’

Sarah Coles: We’ll look at how some of the biggest listed names are [s.l. faring 1:02] with Sophie Lund-Yates – our Lead Equity Analyst. We’ll also talk to Tim Tyson from TriRx – a development and manufacturing organisation for the pharmaceutical industry in the US – who has an excellent overview of the industry both here and globally.

Tim, this is a really interesting time for the industry, isn’t it?

Time Tyson: Yes, it is an interesting time – a lot of things happening on a geopolitical basis.

Susannah Streeter: We’re going to dig into that a little bit later, Tim – really great to have you on the podcast. We’ll also be talking to Emma Wall – our Head of Investment Analysis and Research for a Fund Manager perspective.

But, first of all, it does make sense to take stock of where the pharmaceutical industry is after a whirlwind few years.

Sarah Coles: It is worth highlighting this is a massive industry for the UK, employing 66,000 people in over 600 businesses – and with a turnover of £40.8bn. It also adds £14bn of value to the UK.

We’re now four years on since the UK went into its first COVID lockdown, when pharmaceuticals really came into the spotlight. Pfizer launched the first vaccine, followed by others – including AstraZeneca. It was the fastest ever launch of a vaccine.

Susannah Streeter: Yes – AstraZeneca produced a drug that was cost-effective and simple to distribute, while Prizer’s was expensive and needed sub-zero temperatures from lab to jab.

Meanwhile, GSK’s efforts petered out, producing little but disappointing trial outcomes until it was too late to really matter.

The pandemic was somewhat of a minefield for the sector. Many were able to book substantial revenues from selling vaccines – however, the margins on those revenues could be low. AstraZeneca promised to deliver the drug at cost during the pandemic, and they soon subsided. There was also significant challenges posed by the pandemic itself, including supply chain issues.

Sarah Coles: In the short-term, addressing the pandemic absorbed the sector to such an extent that research and development slowed in other areas, while more focus was put on respiratory diseases, infectious diseases, and vaccines.

However, this did prove short-lived – and, away from the pandemic, other developments in both medicine and society have been key for the sector since.

Susannah Streeter: Structural developments have meant demand for treatments remains high. Cancer in the UK continues to rise, with breast, prostate, and colorectal cancers accounting for more than 50% of all cancers.

There have been significant developments in Oncology, with new treatments for breast, lung, and gastric cancers.

Sarah Coles: And, of course, the population is aging too, so more people are living longer, when they tend to develop more conditions which need to be treated.

But, interestingly, that’s only part of the picture because more of us are living with health problems for longer – because we’re actually getting sick earlier in life and healthy life expectancy is falling.

Susannah Streeter: Part of this is due to lifestyle factors. This lies behind the fact that diagnoses of diabetes more than doubled over the past 15 years, and the number of morbidly obese people in the UK – with a BMI of over 40 – is forecast to double by 2035, which creates any number of health problems, but also a huge market for a solution.

One of the most significant developments for the industry has been in diabetes and weight management medicine – new classes of drugs called GLP-1 and SGLT-2.

Sarah Coles: Clinical demand for GLP-1 is intensifying as diabetes becomes more common.

Commercial demand for SGLT-2 is red hot too. Novo Nordisk of Denmark and Pfizer are leading the charge at the moment, with others trying to edge in.

Developing a new drug from scratch can take a decade or more, so there’s likely to be a scramble from the big pharmaceutical companies to buy smaller rivals, with promising GLP-1 candidates under development as they try to catch up.

Susannah Streeter: However, there are also headwinds for the sector to navigate – and costs are among the trickiest. Inflation, interest rates, tax regimes in some parts of the world, and an environment of increasing threats is raising the cost of doing business.

The biggest market in the world for drugs is the US – and, here, the Inflation Reduction Act will allow Medicare to negotiate drug prices for the first time, which could make a significant difference to price in each therapeutic area.

There is also major competition, as more scientific development means more treatments available and companies going head-to-head for sales. R&D spending is most focused on blood treatments, followed by cancer, infections, musculoskeletal problems and immunology.

Sarah Coles: So, there are clearly competitive challenges as well as opportunities – so this feels like a good time to bring in Sophie Lund-Yates – our Lead Equity Analyst – who’s been looking into some of the biggest listed names in Pharma.

So, Sophie – having said all that – we can’t really avoid talking about Novo Nordisk. What can you tell us?

Sophie Lund-Yates: Hi – you are absolutely right. Novo Nordisk is, of course, the Danish pharmaceutical giant that has set the world – and the stock market – alight in recent times, thanks to weight loss treatments, including Wegovy.

Novo has long been in this sort of arena – it specialised in diabetes care, like insulin, before these therapies went to what can only be described as ‘Viral.’ Wegovy saw a four-fold increase in sales last year.

There’s also talk of oral weight loss therapies, rather than the current form which is injectable. Not only could these be more effective, they’re also potentially more accessible because they’re more palatable. While the growth drivers to Novo definitely centre around these weight loss treatments, new drugs are in an experimental phase which increases risk as there’s no guarantee they’ll come to market.

It’s also worth bearing in mind that there is a risk of a backlash. So, the longer-term or adverse effects from the likes of Wegovy are not well understood. Some concerns are starting to come to light and this will need monitoring.

To put some of this into perspective, Novo Nordisk has operating margins in the region of 40%, which means there’s room to suffer some ups and downs. The group’s price to earnings ratio – which shows how much the market is prepared to pay for future profits – has risen to over 35, compared to 23.7 over the last 10 years. That is a show of confidence from the market, reflecting the group’s enviable market position and attractive end markets. But, as ever, a higher valuation also increases the risks of ups and downs because, when hopes are high, disappointment is felt more acutely.

Susannah Streeter: Thanks, Sophie – what else have you been looking at?

Sophie Lund-Yates: That would be GSK – or GlaxoSmithKline.

Now, first and foremost, what listeners should be reminded of is the fact that, following the demerger of its consumer health division, Haleon, GSK is now a pureplay pharmaceutical developer. This means the research and development of new drugs is the group’s focus – and we’ve been impressed with progress – and one area that caught our attention is that the group had four major product approvals last year.

Pharmaceutical companies are nothing without approvals – for obvious reasons. The risk comes in because getting drugs to market is a very expensive undertaking. And, a bit like I was discussing with Novo, there’s never a guarantee that approvals will come in any given period – and that’s why it’s important to focus on companies that have proven track records in research and development – because, as much as nothing’s guaranteed, it’s important to start by looking at those with stronger foundations.

Some areas that GSK specialises in are shingles treatments and HIV. HIV drugs make up about 20% of the group’s £30bn of annual revenues. Looing further out, cancer drugs are seen as a growth area – and there has, unsurprisingly, been a reduction in COVID-19-related sales. The worst of the effects of this on results looks to have washed through the system.

A big driver of sentiment – and, therefore, valuation in the short-term – will be the outcome of court hearings relating to the concerns about cancer links to heartburn drug, Zantac. Concerns about this are reflected in the lower valuation compared to the average, and the team continues to have conviction in the company, but there are heightened risks of ups and downs which shouldn’t be ignored.

Sarah Coles: Thanks, Sophie. What’s the final name this week?

Sophie Lund-Yates: So, the final name this week is AstraZeneca, which is, of course, another UK-listed pharmaceutical giant. Astra was hit hard because – as many listeners will know – it was at the forefront of COVID-19 vaccinations – and, when the tide turned, so too did the group’s sales.

That said, Astra has done a stellar job of offsetting this – and we’re especially supportive of the group’s position in speciality medicines and treatments for rare diseases. While coming up with treatments for these can be more technically challenging, it makes the eventual products that much more attractive. The group’s bigger push into product development is likely to have an effect on profitability for now, which serves as a reminder to consider investing – especially in individual stocks – on a longer-term view.

We like Astra’s specialised approach because it could spell better margins in the future, but these novel therapies don’t appear overnight. With that in mind, investors should continue to assess the balance sheet – and Astra’s is in reasonable shape. We’ll be keeping an eye on it, though, as the groups looks to spend mor eon research on development.

Susannah Streeter: So, clearly a lot of change to keep an eye on in the pharmaceutical industry at the moment.

With that in mind, this is a great time to bring back in Tim Tyson.

So, Tim – there’s an awful lot to cover here, but let’s start with gaining an insight into your perspective. Can you tell us about TriRx, and just how it gives you an overview of the industry?

Tim Tyson: TriRx is a global contract development and manufacturing organisation that serves the global pharmaceutical industry. The most pressing challenges are access to innovative medicines that can treat some of those difficult conditions that you’ve been talking about – and getting them to the people when and where they need them.

Susannah Streeter: How does your company provide a part of that jigsaw?

Tim Tyson: We’re involved in the development and manufacture of medicines – so we develop, and make, and deliver products around the world. We’re involved in both human health and animal disease. We make all types of medicines – liquids, creams, ointments, ingestibles, and oral dosage for medicines.

Sarah Coles: So, given you’ve got this global overview of different companies operating everywhere, how d’you say the UK pharmaceutical companies stack up?

Tim Tyson: The UK has always been a source of innovative medicines as well as a challenge – and facilities and capabilities: a strong piece of the international global pharmaceutical supply chain.

Susannah Streeter: What do pharmaceutical companies need to do to grow here? What are the challenges that they face?

Tim Tyson: The challenges – like all markets – are facilities, capabilities, talent – and the ability to have support from the Government to ensure that it’s not overly taxed and incentivised to make investments.

Susannah Streeter: How does the UK stack up compared to other governments around the world on that criteria? Would you say that a lot more needs to be done? Could you point to any kind of innovative projects that have helped to boost the potential for growth?

Tim Tyson: The UK is – around the world – an average country to do business in. Some of the most recent things that have happened are some grants to support [s.l. inward 12:28] investment and to encourage employment in the United Kingdom – and very strong support and government to industry relationships.

Sarah Coles: You’ve mentioned ‘Talent’ a couple of times – so is there a global shortage of the talent that these companies need in order to grow?

Tim Tyson: The pandemic created a lot of problems and challenges from people and availability of resources – and highly-confident, skilled, motivated talent is achieved in our industry.

Susannah Streeter: What’s the best way of producing such talent, and ensuring that companies are able to access this talent easily?

Tim Tyson: I think, in our space – where we’re looking for scientific and medical technicals from both the science and engineering backgrounds – it’s important to have a relationship with the universities, and to encourage a university and industry relationship to ensure we get the right type of skills and talent.

Susannah Streeter: Tell me a little bit about your sites in Speke and Liverpool – and in the North-West of England. How has that tied into marrying of both the academia and industry?

Tim Tyson: That’s a good question. It was founded back in the war to produce innovative antibiotics to solve some of the infectious disease – and it was a result of the types of wounds and the things that occurred during the war.

Right now, two or three changes going from where it started as producing life-saving medicines for infectious disease, it’s now producing medicines for all types of disease – and we have a strong relationship with the universities in that area – both in Liverpool, Manchester, and in Durham – as well as at Oxford and Cambridge.

Susannah Streeter: What would you say the most interesting developments are right now in the industry? Is it immunotherapy drugs, for example?

Tim Tyson: The immunotherapy drugs – a lot of them in the monoclonal antibodies are critical to the continuing solution of difficulties that humans and animals suffer from – and we have a strong focus on monoclonal antibodies – and actually have a partnership with the UK Government to build a very strong capability in the production of monoclonal antibodies at our site in Speke.

Sarah Coles: In terms of the industry, d’you think there’s any risk about the concentration of research? Weight management drugs are obviously on the top of everybody’s lists at the moment! D’you think there’s a real risk that the focus goes onto those and then comes away from some of these other areas – or d’you think there’s a decent balance, even when you get a particularly hot type of drug?

Tim Tyson: I think there’s a balance in the industry – always has been and always will be. The industry migrates to areas where there’s opportunity. There’s both scientific problem-solving opportunities as well as economic and commercial advantages – and so, it’s the long-term/short-term – and I think there is a balance and a concern for helping to solve some of the problems that humans and animals face, with a focus on developing a broad spectrum of medicines for treating those conditions and diseases.

Susannah Streeter: How excited are you about the prospects for AI in the pharmaceutical industry – particularly your business?

Tim Tyson: It’s an unchartered area with huge opportunity. Mining data has always been the future of innovation in our industry – and being able to mine data – and to put together algorithms that can accelerate the ability to do that – is absolutely essential.

Susannah Streeter: So, lots of opportunities – but what would you say is the biggest challenge you’re facing at the moment – and how are you approaching it?

Tim Tyson: I think the biggest challenge is cost of medicine on a global basis – it is a major pressure. And so, balancing the cost of research and development – and bringing medicines to the marketplace – and having the appropriate governments and people to pay for those medicines is a challenge. Balancing those is critical – and doing things that are fair, cost-effective, and in a reasonable basis is critical for everybody.

Susannah Streeter: Okay, Tim – thank you so much for joining us. It certainly seems like an interesting time for the sector of [inaudible 16:37].

Tim Tyson: Thank you.

Susannah Streeter: And, with that in mind, let’s bring in Emma Wall – our Head of Investment Analysis and Research, who’s been discussing the sector in detail with John Baylor of BNY Mellon.

Emma Wall: Hi, John.

John Baylor: Hello, Emma.

Emma Wall: We’re here today to talk about pharmaceuticals. I thought we’d go back to basics – what is it about the pharmaceutical sector that appeals to you as an investor?

John Baylor: So, as a US equity-income investor – we like the pharmaceutical sector because it provides a couple of characteristics that we look for in portfolios – one of them being good, downsized protection because they have limited economic activity. They also provide very good dividend yields – at least the pharma stocks do within the Healthcare space.

We also think they’ve got [s.l. all these 17:29] trajectories that, right now, look to be – in some cases – in really good shape in terms of their being able to grow earnings on a secular basis – as people get older and use more drugs.

Emma Wall: And, of course, nothing is guaranteed with investing, but pharmaceutical firms – there is a bit of forecasting you can do with revenues – isn’t there – because of the nature of the drugs and the way that patents work?

John Baylor: That’s exactly right. One of the things that we think we do well in the pharmaceutical space is we find opportunities where there’s a lot of scepticism in the future pipeline of the drugs – and we look for those companies – where there’s scepticism – the stocks are trading at very cheap levels of free cash flows – the high free cash flow yields – the cheap on how much cash flows they’re generating – and we try to get a differentiated opinion on those pipelines. In a lot of cases, we’re [s.l. find 18:28] a lot of that scepticism, but we’ve done our fundamental work, and we believe that they’re going to do much better on their pipeline drugs than the market believes – and that has historically been where we’ve found the most opportunities in the space.

Emma Wall: Let’s talk a little bit about the risks.

In the past, this has been a bit of a political football – we’re going back to the Hilary Clinton era here. Because the pharmaceutical sector – much like tech at the moment as well – attracts some political conversation around regulation. Is that something that you are thinking about when you’re analysing these companies?

John Baylor: Absolutely. The political environment is very important – especially for the pharma stocks here in the United States. What we believe is – at least going into this presidential election – the Republican and Democratic parties are actually more alike than they are different. President Trump and President Biden are very populist. So, we do think that there is a little bit of risk in terms of drug-price negotiation.

That being said, we did have the IRA Act passed – and one of the ways we’ve paid for the IRA Act is price negotiation on Medicare drugs. And so we know what drugs are on that list, currently – and we have really avoided those businesses that have drugs and reducing the amount of Medicare exposure in our portfolio.

Going forward, the likelihood of a divided government is very high. So, our belief is there really isn’t going to be much that gets done in a divided government – and, because you’ve already passed the IRA Act, there probably isn’t anything big, incrementally, that’s gonna happen on drug-price negotiation. It’s just gonna to be small tweaks to the legislation.

Emma Wall: Let’s talk about the opportunities. It has very much been headline-grabbing in the last 12 to 18 months – the weight loss sector – Ozempic – and its peers – particularly around for the next generation. Where d’you see this trend going – and is there much that already priced in?

John Baylor: Yes. So, we were very bullish a few years ago on the weight loss drugs – the GLP-1 drug. We owned the biggest beneficiary of the weight loss drugs in the US – and we owned it because we had a very differentiated view of the weight loss market – and also the Alzheimer’s market for this individual company – we thought it was gonna be much better than expected – and it had really played out the way our analysts saw it playing out, and we thought that you could get to $90bn in terms of a market opportunity for weight loss drugs – which was larger than what a lot of people were expecting a few years ago. But, at this point – and we moved on from that stock last year in 2023 – because we think the market is pricing in that full benefit of the GLP-1 drug. The way we look at it is two discounted cash flow models. We think these companies are pricing in a 4% perpetual growth rate after you get to that $90bn market – and we just think that’s too high – because, once you have developed this drug – once you’re selling it on a normalised basis – there’s obviously gonna be competition. Potentially, there is gonna be generics of the drug.

Historically, for pharma companies, you do not pay more than a 2% perpetual growth rate on your discounted cash flow model – once you get to normalised cash flow level. So, we just think you’re paying too much for these companies, so we don’t have any exposure there right now.

Emma Wall: What about what’s currently in the portfolio? Is it any particular companies – or subsectors – or trends – that you think are exciting you right now?

John Baylor: We think there are companies that the perception is they’re gonna get hurt by GLP-1 drugs – so we own a number of companies that are medical device companies for cardiovascular surgeries. We also own a company that actually benefits because they need the syringes for the GLP-1 drugs. So, we really think that’s where the opportunity is in the market. A lot of those companies got hurt by the pandemic – there was less procedures during the pandemic – and we see innovation really moving up right now – in terms of surgeries and elective surgeries. [Inaudible 22:40] certainly do well and a lot of these medical device companies are starting to do well – so that’s really where we’re seeing the best opportunities in the Healthcare space.

Emma Wall: John – thank you very much.

John Taylor: Thanks, Emma.

Sarah Coles: That was Emma Wall talking to John Baylor of BNY Mellon – and please bear in mind that these are the views of the Fund Manager and are not individual stock recommendations.

Susannah Streeter: You’re listening to Switch Your Money On from Hargreaves Lansdown. Before we go, there is time for the stat of the week – and, as we mentioned earlier, healthy life expectancy is falling – but the question is, at what age are we likely to stop leading a healthy life and develop one or more conditions?

And because this is reported separately for different nations of the UK, we’ll just take ‘England’ for the sake of simplicity.

So, Sarah – I know you’ve looked into this, because we were talking about how it’s lower than the state pension age – which gives you a decent clue. But can you remember the age when men and women are likely to fall into ill-health?

Sarah Coles: Now you’re asking. I do know that it’s in our early 60s that you start to suffer from ill-health. I just can’t remember when, but I’ll go down the middle – I’ll say, ’63.’

Susannah Streeter: You’re very close. At birth – in 2022 – for men – it was just under 62-and-a-half – and, for women, it was just over 62-and-a-half – so you’re slightly too optimistic.

Sarah Coles: I am – although it hasn’t stopped me funding my pensions just in case. In financial planning terms, I’m definitely a belt-and-braces – and then another belt-for-good-measure kind of a planner.

Susannah Streeter: Which, if nothing, else, is a very interesting fashion choice!

Sarah Coles: [Laughs]

Susannah Streeter: That’s all from us for this time – but, before we go, we do need to remind you that this was recorded on 15^th April 2024, and all information was correct at the time of recording.

Sarah Coles: Nothing in this podcast is personal advice – you should seek advice if you’re not sure what’s right for you. Investments rise and fall in value, so you could get back less than you invest – and past performance is not a guide to the future.

Susannah Streeter: Yes – this not advice or a recommendation to buy, sell, or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.

Sarah Coles: And this hasn’t been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.

Susannah Streeter: Non-independent research is not subject to FCA rules prohibiting dealing ahead of research – however, HL have put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.

Sarah Coles: You can see our full non-independent research disclosure on our website for more information. So, all that’s left is for us to thank our guests: Tim, John, Sophie, Emma, and our Producer, Elizabeth Hotson.

Susannah Streeter: Thank you very much for listening. We’ll be back again soon – goodbye!