Investors in pharmaceuticals have been paying close attention to the markets following the announcements of two high-profile potential tie ups.
AstraZeneca is the subject of a, so far unsuccessful, takeover bid by its rival - US firm Pfizer. Its share price jumped 23.19 per cent over the past two weeks as the revelations gained traction.
Share prices at GlaxoSmithKline and Novartis have also been rising following the announcement of an asset swap and merger of consumer health units.
Three trusts with high exposure to some or all of the four companies have all benefited from the potential M&A: Merchants Trust, Henderson European Focus Trust and Polar Capital Global Healthcare Growth & Income.
Merchants Trust
This investment trust in the UK equity income sector has 8 per cent of its assets invested in GlaxoSmithKline.
The increase of corporate interest in M&A follows a recent trend of renewed interest in mega caps, taking advantage of higher valuations available for selling assets than those reflected in the stock market, says Simon Gergel, the trust’s manager.
“We welcome the transactions between GlaxoSmithKline and Novartis. Glaxo is consolidating their global leadership positions in vaccines and consumer health, both businesses that benefit from scale advantages, with good growth prospects and with limited risk from generic competition,” he said
“At the same time, they are selling their oncology franchise for a historic sales multiple of close to ten times, which highlights some of the hidden value within the company. Glaxo will also be able to benefit from efficiency gains across these three areas.”
“Vodafone sold their stake in Verizon Wireless at a high price, Glaxo has announced the sale of their oncology franchise to Novartis and BP have a number of oil and gas assets.”
Its large holding in the booming stock has helped it to outperform within its sector. Over the past month it has risen to a top quartile position from a bottom quartile position over the past six months.
Over three years the trust has lagged behind its sector average by almost 9 percentage points but stayed ahead of its benchmark.
It has returned 41.41 per cent compared to an average return in the IT UK Equity Income sector of 50.15 percent. The FTSE All Share has made 24.52 per cent over the same period.
Performance of trust vs sector and benchmark over 3yrs
Source: FE Analytics
The trust is currently trading almost at par and has ongoing charges of 0.59 per cent.
Henderson European Focus
This trust from the Europe sector has 7 per cent of its assets invested in Swiss pharmaceutical firm Novartis, which has agreed an asset swap deal with GlaxoSmithKline.
John Bennett, manager of the Henderson European Focus Trust, says that the European pharmaceuticals industry is only partway through what he expects to be perhaps a decade-long renaissance.
“This deal will see Novartis exchange its vaccine treatments for GSK’s oncology products and the creation of a jointly operated over-the-counter consumer healthcare business, with lines in ‘wellness’, oral health, nutrition and skin care. Novartis will also sell its animal health arm to Eli Lilly in a separate transaction.”
“Novartis has been our largest position for some time, reflecting the significant level of conviction we have had in the company’s prospects.”
“We expect this accord to feed through to greater profits over time, due to the high-margin nature of the firm’s cancer business, versus the less profitable operations it will be divesting, in animal health and vaccines.”
Henderson European Focus has been the best performer in its sector over three years, returning 62.52 per cent compared to the 42.87 per cent sector average. The FTSE World Europe ex UK rose 17.68 per cent over the same period.
Performance of trust vs sector and benchmark over 3yrs
Source: FE Analytics
“The agreement between Novartis and GSK has added to speculation around the prospects for further M&A activity in the pharmaceuticals sector,” he added.
“But, beyond the short-term market noise, the trade represents part of an ongoing evolution of the industry as companies strive to improve their financial strength, efficiency, competitiveness and reduce their reliance on ‘blockbuster’ drugs.”
The trust is currently on a discount of 0.9 per cent and has ongoing charges of 1.07 per cent inclusive of a performance fee.
Polar Capital Global Healthcare Growth & Income
This trust in the Biotechnology and Healthcare sector has significant holdings across the pharmaceuticals sector, with 7 per cent of assets in Novartis, 7 per cent in GlaxoSmithKline, 6 per cent in AstraZeneca and 5 per cent in Pfizer.
This 25 per cent percent of the fund in the four companies has helped it to rise 5.34 per cent in the past two weeks. The trust is currently on a premium of 2.7 per cent.
Over three years the fund has made 57.8 per cent, according to data from FE Analytics, as the MSCI World Healthcare has risen 62.76 per cent.
Performance of trust versus benchmark over 3yrs Other investment trusts with large holdings in Novartis, GlaxoSmithKline and AstraZeneca include , have Keystone, Perpetual Growth & Income, Edinburgh Investment Trust and Invesco Perpetual Select UK Equity, all managed by Mark Barnett.
Keystone, of the UK All Companies sector, has holdings of 3 per cent in both Novartis and GlaxoSmithKline.
Invesco Perpetual Select UK Equity, also of the UK All Companies sector, has holdings of 4 per cent in Novartis, 3 per cent in GlaxoSmithKline, and 4 per cent in AstraZeneca.
Edinburgh Investment Trust, of the UK Equity Income sector, has holdings of 6 per cent in both GlaxoSmithKline and AstraZeneca,
Perpetual Income & Growth, of the same sector, has investments of 4 per cent in Novartis, 3 per cent in GlaxoSmithKline and 4 per cent in AstraZeneca.
Polar Capital Global Healthcare Growth & Income is on a discount of 2.7 per cent and has ongoing charges of 1.15 per cent.
