Kevin Lilley has been adding to the £58.4m Old Mutual European Equity fund’s pharmaceuticals allocation as the sector’s defensive growth characteristics re-emerge.
Lilley says pharmaceuticals’ position as “darlings of the market” has been damaged in recent years as the industry deals with high costs, expiring patents and increased competition from biotechnology and generic drugs.
However, he says this less favourable view is no longer an accurate reflection of the sector as recent moves have helped to restore the defensive growth characteristics valued by investors. (article continues below)
For example, Roche and Sanofi bought their respective biotech rivals, Genentech and Genzymes, while Novartis acquired the American eyecare company Alcon.
These companies are the basis of Lilley’s increased allocation to pharmaceuticals. He has taken a meaningful new position in Novartis in the past few weeks, and his exposure to Sanofi and Roche was increased over the past three months to make the stocks his top two positions.
“When we combine the growth outlook with valuation and yield characteristics, in my view the case for the sector is compelling,” says Lilley. “Sanofi, Roche and Novartis have dividend yields around 4.5%, with a price/ earnings ratio for the most expensive of 11.5 times expected earnings for 2012.”
Dividend yield is especially important at this time of year, Lilley adds, as most pharmaceutical companies pay dividends between April and June.
Furthermore, news flow and analyst coverage of the sector will increase between now and June as there are six major events in the industry covering cardiology, cancer, neurology, respiratory, rheumatism and diabetes.