The MSCI Health Care Index performed badly in November, gaining only 1.2%, in dollar terms, compared with 5.3% for the MSCI World Index. But looking more thoroughly at the various components of this index big differences emerge. For example, in November the World Health Care Equipment & Suppliers portion of the index rose practically 4% while World Health Care Providers declined 10%.
World Health Care Pharmaceuticals, the principal component of the World Health Care Index, gained 2.1% during this period but there were huge differences between one company and another. Eli Lilly, for example, gained an impressive 23% in November while Johnson & Johnson lost 3%.
This behaviour is quite in line with the current investor rotation into defensive areas of the market. When the stockmarkets are rising the sector generally underperforms the overall market.
For example, from October 9th – the last market bottom – to December 10th the MSCI Health Care Index gained 5% compared with a 14% rise for the MSCI World Index.
The 384 funds in the pan-European Morningstar Life Sciences Sector category performed slightly better than the benchmark during November. Indeed, the average return reached 3.4%. This can be explained by the fact that some of the big biotechnology companies rebounded strongly during this month, pushing the Nasdaq Biotech index up 9.1%.
Biogen was a clear outperformer with an increase of 20.3% thanks to positive news about Avonex, its flagship multiple sclerosis treatment, and its new drug to fight psoriasis. In comparison Amgen, another big biotech company, gained only a timid 1.4% over the same period.
The political factor
The Republican victory in the Congressional elections last month is in theory a positive factor for the drug industry. Republicans generally support private-sector prescription drug benefits. In contrast, the Democrats tend to prefer prescription drug coverage under the government's Medicare program, which means price controls for the big pharmaceutical companies.
Yet on the other hand there is also George Bush’s proposal to speed up the entry of generic drugs into the American market. As an ABN AMRO manager commented: “Although the proposal is part of the election campaign, it is clear that healthcare will remain high on the political agenda”.
Outlook
There is no doubt that the fundamentals of the sector are strong, that the long term outlook is positive and that the sector is cheaper than at the beginning of this year. (It has suffered a 17% decline from the beginning of 2002 until the end of November – in line with the MSCI World Index.)
Investors must also be aware that competition from generic drug makers, patent expirations and the political factor have distorted what was traditionally considered a stable and safe industry.
Yet there is also some light at the end of the tunnel. According to ING Asset Management, despite the fact that third quarter figures were broadly in line with expectations, “thanks to the fading out of some major patent expirations, earnings growth for the sector as a whole is now expected to resume”.
