The South African pharmaceutical industry has been greatly expounded in the media in the past few months. The reason is not, however, as a result of the sector’s amazing rise in share prices, but as a consequence of frequent government intervention.
The Johannesburg Stock Exchange pharmaceutical index has risen from a December 1997 low of 2 200 to its present level of 3 600 – a climb of 67% in less than six months, which highlights two crucial questions for investors. The first is whether the sector can sustain a further rise despite the present bull market and, secondly, whether interference by the state will limit any more capital gains for investors.
The United States government has placed South Africa on its watch list of countries where US intellectual property rights could be infringed. This was motivated, in part, by US pharmaceutical companies as part of its campaign against South Africa’s intention to buy generic medication.
The related Medicines and Related Substances Control Act could affect not only the sector, but future growth in pharmaceutical companies, particularly those manufacturing or retailing branded products.
Reacting to the Act, a representative of the office of US trade said: “The need to provide protection [for branded products] is demonstrated by the approval in South Africa of a generic copy of a medicine, which still has undisclosed data protected from competitors’ use in many countries.”
Under a globalisation scenario of increasing competition and lowering prices, the South African industry cannot afford political conflict. Nonetheless, companies in the sector have done well in the past six months.
Adcock Ingram’s share has moved up 53,4% since January 1998 to a present level of 2 500c. Attributable income rose by 26% to R197,3-million and dividend was up by 33% to 20c. The company holds cash resources of R737-million. Analysts believe that Adcock’s brand names, product mix, over-the-counter sales and hospital and generic products are performing well and interim headline earnings per share should rise by 20% to 30% this year.
The notable change in the industry is, therefore, not obvious in published results or share prices. Mergers and takeovers have helped bolster share prices. Further change in the industry is still to come.
This is confirmed in the May 1998 issue of the EW Balderson newsletter, Shared Ideas. It states: “Fedsure is still expanding its health care interests and has bought 30% of SA Drugs for R609-million. Together, Fedsure, SA Druggist and Network Health care Holdings (Netcare) form a formidable all-service health care business.” SA Druggist’s share has moved from a January 1998 level of 1 920c to over 3 000c.
The newsletter adds: “Fedsure holds 25% of Netcare, which has the potential to earn 15c on a forward 16 price/earnings ratio of 222c share price.”
Netcare is presently only using about 60% of its bed capacity and has the potential to improve turnover in 1998/1999. Netcare’s share price has climbed from 130c in January to 240c.
Other companies performing well include Carsons Holdings, which saw its share rise from 470c in January to 1 100c.
Auckland Investment’s share has moved to 255c (80c in October), Medex to 300c (160c) and Alliance Pharmaceutical 160c (90c).
The sector index should continue to rise for at least another three months.
Technicals indicate that the sector is becoming overbought and that a downward correction will take place in the short term.