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.

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