A year ago, it would have been easy. Pharmaceuticals were the darlings of the stock market, share ratings were at big premiums of up to 20 per cent, and they looked like a gold mine from the investor's viewpoint. Splitting Zeneca from the rest of ICI at that time would have had clear benefits in releasing unrealised value.
But the sector fell out of bed, in Britain and the US. The big rerating began and drug stocks tumbled. Over the past year, UK pharmaceuticals have fallen by about 25 per cent. The sector is now trading at a 7 to 8 per cent discount to the market. Even Glaxo - not long ago the biggest stock on the market - is yielding much the same as any ordinary industrial stock.
Zeneca's pathfinder prospectus published last week did little to convince the City that there was any significant short-term gain to be had from the newly independent company. Instead, in a market that has fallen out of love with drug companies, Mr Barnes is having to emphasise the benefits of focusing management attention on pharmaceuticals, and on the freedom Zeneca will have from head office bureaucracy. The argument that the drugs side has been stifled by ICI's slow-moving and less profitable chemicals business is already finding favour with investors.
There is more scepticism over Zeneca's claim that its 'pipeline' of new drugs has powerful earnings potential. There are no obvious blockbusters in the list. Quorn - the vegetarian meat-substitute that Zeneca claims could achieve sales of pounds 1bn - may also not prove to be so popular. Meanwhile, Tenormin, the company's heart drug and its biggest seller by far, has come off patent with a consequent drop in profits.
To counter these doubts, the core of Mr Barnes's City offensive is the argument that the rerating of pharmaceutical companies has come to an end and that sentiment is on the turn. Fortunately for him, there is growing evidence in the stock market to support this view. ICI's own shares shot up more than 50p after the pathfinder was published last week to 1,288p on strong buying, largely from the US. Some of this was fuelled by enthusiasm for the demerger plan, but part also stemmed from optimism over Zeneca's prospects as a drug company.
The precipitous fall in other drug company shares this year has also slackened. Glaxo's share price was easing upwards slightly last week, while the sector rose by 3-4 per cent in the US.
'The sector has been oversold on price grounds,' said Robin Gilbert of Panmure Gordon, who has been one of the more bearish analysts in the market. 'With the sector at a discount, the market is saying that pharmaceutical companies are not as attractive as general industry,' said Sam Isaly of New York health consultants Mehta & Isaly. 'That is wrong.'
Quite abruptly, many of the factors that have been driving down share prices in the sector seem to have lost much of their force. The biggest worry was the trend among Western governments for placing new limits on drug prices. The move was probably inevitable, given the often staggering hikes in drug prices over the past few years. A US Senate report in 1991, for example, found that the cost of some common drugs had risen by more than 130 per cent between 1985 and 1991, compared with a rise in the consumer price index of 21 per cent over the same period. Despite drug company claims that high prices were needed to cover mounting research and development costs, the increases generated appalling publicity.
President Bill Clinton's administration promised a frontal assault on drug companies. The President said the industry spent 'dollars 1bn more each year on advertising and lobbying than it does on developing new and better drugs'. Hillary Clinton, in charge of restructuring the US healthcare system, is expected to come out with new proposals in the next few weeks to curb the industry's supposed excesses.
But those curbs are beginning to look less draconian than the stock market had once feared.
'There is a perception that the proposals face serious opposition and political inertia,' Mr Isaly said. 'The Republicans are opposing them on the grounds that the pricing system is self-righting through competition.'
A week ago, Merck - the world's largest pharmaceuticals group - offered the US administration a deal to limit price rises to the rate of inflation. The rest of the industry seems likely to follow suit. If Mrs Clinton accepts the offer, drug companies could escape quite lightly. 'If the inflation-linked proposal includes drugs coming off patent, the companies will do well,' Mr Isaly said. 'They will have a formula that allows them to maintain the price of drugs which would otherwise fall sharply.' Merck, for instance, has about 20 per cent of its drugs coming off patent, and their prices would drop immediately by as much as 50 per cent because of competition from imitators.
Despite the easy target presented by the drug companies, the Clinton proposals are now expected to aim more at other health costs. Of the 14 per cent of gross national product spent by the US on healthcare each year, only 1 per cent goes on pharmaceuticals. Clearly, there are bigger savings to had elsewhere.
The Clintons also want to bring 37 million Americans not covered by health insurance into the healthcare system for the first time. This is the equivalent of adding a new market the size of Spain to the already massive US market. Understandably, the drug companies are rubbing their hands.
In any case, the rising volume of sales has always been more important to the growth in drug company profits than any rise in prices. Demographic changes, particularly longer life expectancy would appear to ensure that demand in Western countries can only continue to rise.
This is not to say that all drug companies will enjoy an untroubled growth in profits over the next few years. 'Companies with more serious drugs in their portfolio will do better than those which concentrate on 'comfort' drugs,' Mr Barnes said. No health reforms are likely to do away with serious operations requiring, for example, anaesthetics. They may, however, cut down on expenditure on less crucial products such as laxatives or cold remedies.
While pharmaceutical shares may not regain the heights of the late 1980s, Zeneca's detachment from ICI may not be so badly timed. Market sentiment appears to be swinging in their favour once more, and as Mr Barnes observed, 'The outlook for pharmaceuticals is at the upper end of industrial sectors.'
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