Will UK pharma shares keep outperforming the FTSE 100 index?
FTSE 100 index shares have fallen since the outbreak of COVID-19, with the exception of UK pharma. But can the pharma rally can be sustained for much longer?
For the vast majority of UK industries, the current economic downturn has spelled disaster. However, there are a few notable exceptions to this rule, with one of the most striking being the UK's £42 billion pharmaceutical industry.
FTSE-listed giants in industries such as aviation and banking are still reeling from the February crash that wiped out the share price of some of Britain's biggest companies. However, the share price of the FTSE 100 index's three pharmaceutical companies, AstraZeneca (AZN), GlaxoSmithKline (GSK), and Hikma Pharmaceuticals (HIK), has barely been affected.
In fact, the GSK and HIK share price is actually up significantly from pre-COVID prices, with HIK having gained more than 50% since February. So, what explains this rally, and can it be sustained for much longer? Let's take a closer look at the state of play for UK pharma giants.
GSK, AZN, and HIK consistently outperform the FTSE index
It's no secret that defensive stocks such as pharmaceuticals tend to hold out well during times of recession since the demand for their products is unlikely to wane and may actually increase. However, this does not wholly explain the sustained rally seen by UK pharma stocks in recent weeks.
Since the beginning of the COVID-19 pandemic, all three FTSE pharma companies have reported increased revenue and sales growth. Just last week, AZN released its quarterly earnings report that revealed a 16% rise in revenue, with earnings per share (EPS) up 27%. Similar results can be seen with GSK and HIK.
Put simply, market demand for some of the UK pharma industry's most popular products has skyrocketed since the outbreak, with anti-inflammatories, anti-bacterial drugs, respiratory aids, and conventional painkillers all flying off the shelves as health authorities around the world build stockpiles. GSK and AZN, in particular, have stood to benefit, as they enjoy a very strong market position as two of the largest pharmaceutical companies on the planet.
Can this be sustained for much longer?
While the big FTSE pharma rally was to be expected by some, it is worth asking whether such gains will hold up in the longer term. GSK might be on a strong upward trajectory at the moment, but it suffered the greatest losses out of the FTSE pharma components when markets first began to crash in February.
This is because, unlike AZN and HIK, GSK has a very complex and sensitive global supply chain, which a pandemic can easily disrupt. While GSK has succeeded in tightening its supply chains and bringing some production in-house in recent weeks, it is not difficult to imagine that further disruptions could cause long-term damage.
However, it's also worth noting that FTSE index pharma companies are making moves to cement their strong market positions well into the future. GSK recently announced that it was teaming up with the French pharma giant Sanofi to develop a COVID-19 vaccine, while AZN announced just a few days ago that it was joining the efforts of Oxford University, widely considered to be the most promising candidate in the race, to deliver a vaccine.
Both companies saw significant share price rallies upon the news, something that has continued unabated since. While any potential profit from a COVID-19 vaccine is likely to be limited, it may help to propel AZN and GSK into the realm of global market dominance.
The outlook of healthcare stocks around the world remains positive for the foreseeable future, and the same holds true for the FTSE 100 pharma giants.
How to take a position on pharma stocks – long or short
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You can also invest and own pharma shares with IG. Commission on UK shares starts at just £3 if you’ve traded three or more times in the previous months. Otherwise it’s £8.
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