After losing 11.2% (in euros) during June, the MSCI Healthcare index registered a better than average return in July when it fell by 4.1% compared with a loss of 7.1% for the MSCI World index.
Investor sentiment
Financial scandals are not exclusively affecting the technology or telecoms sector. Some large biotech and pharmaceutical companies – such as Bristol Myers, ImClone and Merck - have also been accused of accounting irregularities. Merck in particular has acknowledged booking $14.1 billion (£9.2 billion) in revenue it did not receive during the last three years.
The other news that
affected the sector in recent weeks was the announcement by Pfizer that it will acquire Pharmacia for $60 billion in shares - which represents a premium of nearly 40% over Pharmacia’s share price. With this merger Pfizer will be the largest drug maker in the world with 11% of global market share. The day after the announcement Pfizer’s share price dropped by more than 15%.
Outlook
Even if the sector fundamentals – such as an ageing population and the need for new drugs - continue to support the case for long term growth, it is increasingly clear that the sector will remain under pressure. Increasing generic competition and the slower development of new drugs should have a substantial impact in the near future. The result of all this is that industry earnings may decline for the first time in a decade.
Apart from this there is also the risk that, as the global economy recovers, investors will shift into more cyclical sectors and away from defensive areas such as healthcare.
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