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Questor: healthcare costs are under pressure but this ‘wonder drug’ saves hospitals money
Questor share tip: as traditional ‘pharma’ business models look shaky, Merck & Co’s new product should deliver more robust profitability
Drugs companies can look like great investments. They turn scientific research into vital, life-saving products that no one else can sell, thanks to patent protection, and thereby produce a valuable stream of dividends. On top of that the world is getting older and richer, so there is ever-increasing demand for effective treatments.
That, at least, is the theory. In fact there are several flaws to this argument. First, drug patents run out after 20 years – and drug testing can eat up eight of them. Second, developing new drugs is very expensive, while dividends are another drain on cash. Third, drug makers face mounting political pressure around the world to cut their prices.
So readers should avoid all such stocks? Not quite. But it’s vital to be selective. “There are more ways to tap into the healthcare economy than just big pharma,” said Simon Edelsten, manager of the Mid Wynd investment trust. Earlier this year he bought his first big pharma stock for several years, Merck & Co, an American firm.
He accepted that it faced some of the problems mentioned above, such as the approaching expiry of patents on its “blockbuster” drugs. But he said Merck’s R&D budget had reached more than a quarter of sales in 2016 and its big new discovery, Keytruda, an “immunotherapy” treatment for melanomas and some forms of lung cancer, stood to save hospitals money rather than put their budgets under further pressure.
“For a third of patients, Keytruda is as close to a wonder drug as there is in cancer treatment: it is effective but has fewer side effects than chemo and radio therapies,” Mr Edelsten said.
“It is not cheap but reducing side effects is an effective way to reduce other significant costs, which makes immunotherapy an area that health providers are incentivised to support. For Merck there is the added advantage that patients are likely to need small amounts of the drug forever, creating a long ‘tail’ of earnings.”
He concluded that the approach of creating cost-effective ways to tackle common health problems “makes more investment sense than researching treatments for rare diseases that risk proving unaffordable”.
Questor says: buy
Ticker: NYSE: MRK
Share price at close: $85.51
Update: Staffline
We wrote last week that a series of mishaps had put the very future of Staffline, the recruitment and training firm, in doubt. We have happier news today: in a share “placing” conducted last week, enough institutional shareholders pledged to buy new stock that the company’s survival was assured.
Although Staffline remains risky, there is the chance of substantial gains from here. Of the two parts of the business, recruitment is much more promising; if the training arm could be sold, the firm could clear its debts and the stock could attract a higher earnings multiple as a result of recruitment’s more dependable earnings.
“If a sale raised enough to clear the debts, even a modest multiple of recruitment’s profits could give the business a market value of about £200m,” said Thomas Moore of Standard Life Aberdeen, who took part in the fundraising. That compares with about £70m currently if the money raised in the share sale is taken into account.
Private investors also have the chance to buy new shares in an “open offer”. The price is 100p, compared with 115.4p in the market, so they have an opportunity to “average down” their cost.
Applications must be received by July 12.
- Read Questor’s rules of investment before you follow our tips
Update: Hargreaves Lansdown
On June 12 we advised readers to hold on to Hargreaves in spite of the criticism it had attracted over its promotion of Neil Woodford’s funds. We pointed out that its customers were a loyal bunch and doubted that many would quit the firm over the Woodford debacle.
Some anecdotal evidence to support our view has reached Questor’s ears: inquiries about Woodford do not feature among the 30 most common questions put to Hargreaves’ help desk by its customers.
Questor says: hold
Ticker: HL.
Share price at close: £19.79
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