Shares: Drug cure for depression: Quentin Lumsden prescribes six healthcare stocks set for recovery

IF THE stock market consisted entirely of healthcare stocks, and the way things are going it sometimes seems as though it soon will, investors would have a very different perspective. Instead of a grim bear market they would see a dramatic bull market, which had paused for breath in the first half of 1991 but now seems to be picking up steam again. My guess is that now is a good time to climb aboard once more.

One problem with the leading healthcare stocks is that they are much favoured by institutional investors and tend to have heavyweight share prices.

In terms of its price-earnings ratio, the cheapest of the six international drug shares I have selected for my mini-portfolio is the Swiss group Roche, which is on a prospective p/e for 1993 of under 13, according to the analyst Andrew Tivenen, of James Capel. But one share in Roche costs a jaw-dropping SFr3,380 (pounds 1,368).

Fortunately, heavyweight prices are no bar to a sizzling performance. Roche shares have climbed four-fold from their levels in the mid-1980s. The same goes for the other shares in my selection. Glaxo at 749p is up five-fold; Wellcome, at 826p, is up 6.5 times. The world's leading drug company, Merck, at dollars 48.25 (pounds 24.14), is up 10 times in dollar terms but nearer 5.5 times for sterling-based investors. Pfizer, at dollars 79.62, also based in the US, was a slow starter in the 1980s, but new drugs have boosted it around 2.5 times in sterling. Lastly, the Swedish company Astra, at Kr535 for the 'A' shares, has grown fastest of all: 8.5 times in sterling terms.

The key attraction of these great healthcare companies is their ability to sustain strong growth in earnings despite recession. The analysts at James Capel suggested the following medium-term growth rates for my selection: Glaxo 14 per cent, Wellcome 20 per cent, Merck 18, Pfizer 19, Astra 25-30 and Roche 20. That looks highly attractive in a world where investors are coming to terms with the prospect that the global economy may stay becalmed into the mid-1990s. A big change in this decade is that the pronounced weakness of the dollar is no longer seen as a negative for European drug stocks, even though they all make a substantial proportion of their sales in the US.

One analyst, Paul Woodhouse at Smith New Court, says observation almost suggests these shares flourish when the dollar is weak. This could be because American investors like to buy strong-currency stocks.

Nor are profits as adversely affected as in the past. Wellcome and other companies manufacture in the US so that they do not have the problem of trying to sell into the US from a high-cost base. Glaxo sources heavily from dollar-bloc areas such as Singapore.

Furthermore, manufacturing costs are only about 16 per cent of final selling prices. Twice as important are sales and marketing costs incurred in the US for sales made there.

A combination of investors neglecting drug shares and general gloom in stock markets has made these pharmaceuticals relatively cheap by historic standards. Astra, for example, has a spectacular portfolio of drugs. Its world-beating ulcer preparation, Losec, has overtaken SmithKline's Tagamet and is second only to Glaxo's Zantac. Yet on analyst Andrew Tivenen's estimates, Astra is on a prospective p/e of 16 on 1993 earnings per share, and could well continue to grow rapidly.

Shares in Wellcome, almost equally fast-growing, have been depressed by the huge shares sale, and the p/e for the year to 31 August next could be below 18. These are undemanding valuations for some of the most exciting and reliable growth stocks.

(Photograph omitted)

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Software Development Manager

£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Day In a Page

As in 1942, Germany must show restraint over Greece

As in 1942, Germany must show restraint over Greece

Mussolini tried to warn his ally of the danger of bringing the country to its knees. So should we, says Patrick Cockburn
Britain's widening poverty gap should be causing outrage at the start of the election campaign

The short stroll that should be our walk of shame

Courting the global elite has failed to benefit Britain, as the vast disparity in wealth on display in the capital shows
Homeless Veterans appeal: The rise of the working poor: when having a job cannot prevent poverty

Homeless Veterans appeal

The rise of the working poor: when having a job cannot prevent poverty
Prince Charles the saviour of the nation? A new book highlights concerns about how political he will be when he eventually becomes king

Prince Charles the saviour of the nation?

A new book highlights concerns about how political he will be when he eventually becomes king
How books can defeat Isis: Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad

How books can defeat Isis

Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
Judith Hackitt: The myths of elf 'n' safety

Judith Hackitt: The myths of elf 'n' safety

She may be in charge of minimising our risks of injury, but the chair of the Health and Safety Executive still wants children to be able to hurt themselves
The open loathing between Barack Obama and Benjamin Netanyahu just got worse

The open loathing between Obama and Netanyahu just got worse

The Israeli PM's relationship with the Obama has always been chilly, but going over the President's head on Iran will do him no favours, says Rupert Cornwell
French chefs get 'le huff' as nation slips down global cuisine rankings

French chefs get 'le huff' as nation slips down global cuisine rankings

Fury at British best restaurants survey sees French magazine produce a rival list
Star choreographer Matthew Bourne gives young carers a chance to perform at Sadler's Wells

Young carers to make dance debut

What happened when superstar choreographer Matthew Bourne encouraged 27 teenage carers to think about themselves for once?
Design Council's 70th anniversary: Four of the most intriguing prototypes from Ones to Watch

Design Council's 70th anniversary

Four of the most intriguing prototypes from Ones to Watch
Dame Harriet Walter: The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment

Dame Harriet Walter interview

The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment
Art should not be a slave to the ideas driving it

Art should not be a slave to the ideas driving it

Critics of Tom Stoppard's new play seem to agree that cerebral can never trump character, says DJ Taylor
Bill Granger recipes: Our chef's winter salads will make you feel energised through February

Bill Granger's winter salads

Salads aren't just a bit on the side, says our chef - their crunch, colour and natural goodness are perfect for a midwinter pick-me-up
England vs Wales: Cool head George Ford ready to put out dragon fire

George Ford: Cool head ready to put out dragon fire

No 10’s calmness under pressure will be key for England in Cardiff
Michael Calvin: Time for Old Firm to put aside bigotry and forge new links

Michael Calvin's Last Word

Time for Old Firm to put aside bigotry and forge new links