When you’re ill, a visit to the doctor can help put you back on your feet. Maybe it’s fitting, then, that pharmaceutical stocks might be just the prescription for investors seeking a palliative to this year’s volatility.
That’s partly due to the defensive nature of much of the health care sector. Illness cares little for the state of the economy. That’s kept demand for medicine steady, with less of the ebb and flow that many products experience over market cycles. As a result, health care has a history of generally stable growth, even during queasy periods.
As for the pharmaceutical industry itself, many health systems are willing to pay for branded medicine when it offers advantages over older alternatives, Capital Group equity analyst Laura Nelson Carney says. That’s helped keep cash flow healthy for established drugmakers with broad rosters of products. For investors, that steady revenue has often translated to consistent dividends.
But there’s more to the pharmaceutical story — specifically, multiple new treatment modalities are proving their utility in real-world settings, adds Nelson Carney, whose coverage includes pharmaceutical and biotechnology companies in Europe and Asia.
For example, antibody-drug conjugates, or ADCs, can be used to more effectively target cancers with fewer side effects than traditional chemotherapy. RNA interference, or RNAi, medications can address some genetic disorders by “turning off” genes that aren’t working properly in a way that is simpler and more scalable than gene therapy and some kinds of gene editing. The U.S. and Europe have approved several of these therapies in recent years. And a handful of larger companies have had recent breakthroughs in powerful peptide weight-loss drugs intended to help overweight diabetes patients.
To be sure, the various tailwinds propelling health care are not spread evenly throughout the sector. In the current environment, with economic uncertainty and possibly a looming recession making it more difficult to fundraise, younger businesses with limited revenue that have pinned their hopes on a handful of unproven research projects are at a disadvantage. Some large companies face many patent expirations in the next decade. The long-term implications of new drug pricing rules, ushered in with the recently approved Inflation Reduction Act, could weigh on the overall outlook for the sector. That could signal a more aggressive political environment in the U.S., though Nelson Carney thinks Washington’s attention may be devoted to other matters for the foreseeable future.
Overall, she says, “many of the large companies are very attractive. They have historically maintained their dividends, they’re less exposed to inflation, and their growth appears stable and secure in the near and medium terms.”
Many of the treatments that regulators have approved in the past few years may seem like miracle cures. They include specialized, cancer-killing cocktails delivered directly to their targets, as well as drugs that can manipulate a patient’s DNA to address once-incurable afflictions. They’re the result of years of research and have come into their own in recent years, Nelson Carney explains.
ADCs, for example, are a class of treatments that can latch onto unique receptors on cancerous cells and precisely deliver a powerful toxin. They’re like targeted chemotherapy. Today’s ADCs seek to “poison the tumor only, without systemic side effects,” Nelson Carney notes. “They are much more specific than older treatments.”
Similarly, RNAi gene therapy can address genetic diseases by “silencing” portions of DNA that aren’t functioning properly. Some therapies have focused on delivering their cargo through engineered viruses, but newer technology is more like a traditional small-molecule medicine — meaning it’s much easier to manufacture inexpensively and at scale. It’s a space that’s ripe for iteration and expansion, Nelson Carney says.
Metabolic disease peptides are another promising area. These are powerful weight-loss drugs designed to help obese people slim down to address health complications. These aren’t like the faddish get-thin-quick drugs that have a history of being dangerous and not particularly effective over the long term; they have trial evidence backing their safety and efficacy. Recently approved drugs can enable 15% to 20% weight loss in a way that so far seems durable. Next-generation treatments could achieve 25% to 30% weight loss, Nelson Carney says.
Although the swimsuit season set is likely going to be interested in these peptides, Nelson Carney cautions that they were designed for people who are clinically obese (that is, they have a body mass index of 30 or more) and suffer health issues because of that extra weight. However, 42% of Americans are clinically obese and a further 30% are overweight, with a BMI of 25 or more, so the potential market for these drugs could be significant.
“Obesity is arguably the greatest public health burden of our time,” Nelson Carney says. “It’s linked to diabetes, heart disease and many other comorbid conditions that carry a huge cost burden to health systems. Reducing the chronic obesity rate, which is the most severe obesity rating and is rising in almost every country in the world, would be a cost-effective way to reduce diabetes, strokes and heart attacks.”
Today’s climate offers another advantage to larger companies: opportunities to add to their bench of revenue-producing medications. Rising interest rates and inflation resulted in investor belt-tightening, which has that’s made it harder for small pharmaceuticals to fund research and produce viable products. That’s allowed behemoths with deep reserves of cash to shop around for promising collaboration partnerships or mergers, sometimes under more favorable conditions than they would have enjoyed just a few years ago.
“Biotech companies with a sizable revenue base, a full pipeline and a unique technology platform are the most desirable acquisition targets that pharma is looking for in today’s world,” Nelson Carney says. “But there aren’t very many of them, so the big companies are looking at all their options.”