4th July 2012
The drug giant is to plead guilty to promoting two drugs for unapproved uses and failing to report safety data about a diabetes drug to the Food and Drug Administration (FDA), reports the BBC.
While Glaxo's share price has been relatively unaffected by the news of the huge settlement, the scandal highlights the risk that unexpected events can hurt even the most ‘stable' companies.
So what has become of big blue chip Pharma stalwarts that have been renowned for forming a solid part of a balanced investment portfolio?
Even through the darkest days of our financial collapse and recession, the sector, dominated by the large multinational players, continued to deliver export growth and a glimmer of hope of economic recovery.
This was despite the potentially high-risk nature of a business heavily dependent on research and development of new products, and patent protection.
Vulnerable to competition – the ‘patent cliff'
However, many drugs in the market are losing patent protection in the coming years, so the need to develop new products while they still have the revenues is huge.
Drug makers lost patent protection last year on products valued at $34 billion in annual sales, an amount that will rise to $147 billion by 2015, according to data compiled by Bloomberg.
This is when high-selling multi-nationals are vulnerable to competition from cheaper rivals, with giant AstraZeneca one of the worst affected by what's known as the "patent cliff".
The rise in M&A
One strategy has been to shift M&A activity to a higher gear. The pharmaceutical industry has been buzzing with activity lately, with acquisitions and new drug developments that have been grabbing headlines.
For example, there is Bristol-Myers Squibb's $5.3 billion deal to buy diabetes drugmaker Amylin Pharmaceuticals, giving Bristol immediate access to a market of growing medical need, while heralding a burgeoning hunger among pharmaceutical companies for acquisitions. The Bristol deal would be the fifth sealed in 2012 for more than $1 billion, and there are more on the cards.
However, pharmaceutical companies are in the grip of the bears. Since the start of the year they have experienced an average fall in share price of 11%, reported Investors Chronicle last month, and the share price charts for the giants in the sector aren't pretty.
"That's terrible for companies that should have benefited from turbulence in other parts of the market," the report adds.
In the wider sector, austerity measures have started to put pressure on medicines prices, alongside the problems in the eurozone and are affecting the outlook for companies with a big presence in major medical markets. Prices are declining.
What about the broader sector?
There is the broader sector for investors to consider. For example, there are companies aside from the giants such as medical device manufacturers and other specialists. In fact, some of the best-performing companies not typically traditional drugs companies, but a mixed bag of semen merchants Genus (GNS), snake-bite treatment salesmen BTG and obscure biotech firms Proximagen (PRX) that do not really share any particular operating characteristics.
Meanwhile, the likes of Abbott Laboratories (ABT) and Bayer (BAYN), whose share prices have both performed well, have pharmaceutical arms that form part of a diversified conglomerate that embraces medical technology.
The phrase "value trap" is increasingly used when talking about pharmaceutical shares, concludes the Investors Chronicle. Even so, the income on offer from the likes of AstraZeneca and GSK is hard to beat.
Meanwhile, remember that recession has not entirely spared any segment or industry in the market, each and every industry has felt the impact of the economic slowdown to varying degrees. And investing in the pharmaceutical companies is still considered to be a safe option in comparison to some, such as the banking sector.
However, with recent news and falls in value, it will pay to be picky.
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