FTSE Friday: Wetherspoons, St James's Place and a pharma pricing battle

The stream of large cap announcements has slowed again this week, making way for the small-cap updates. Paul, Graham and Roland have done a monumental job covering as many announcements as possible this week. You can catch up with all their commentary here.

But there is still plenty to cover in this week’s FTSE Friday:

• A bombshell in pharmaceutical price negotiations which might have negative consequences for the entire sector
• The latest crusade from Wetherspoon’s director Tim Martin
• A surprisingly resilient performance from advisory group St James’s Place

Why pharma investing is a catch-22

The UK isn’t an especially important market for pharmaceutical companies - even the British ones make most of their revenue overseas - but the recent fracas between some of the biggest companies in the industry and the British government is still worth taking notice of.

What happened: Drugs companies break agreement

Since 2019, most of the major drugs companies have been part of a scheme which states that if the NHS bill for drugs grows by more than 2%, the pharmaceutical industry pays the difference. And until recently, the scheme worked well: the pharma groups get access to the entire UK market with very little effort (the NHS, of course, has a monopoly) and the health service gets access to the medicines it needs. What’s more, these clawbacks were previously a relatively small proportion of UK revenue, which was in itself a small contributor to pharma sales.

But in 2022, the NHS handed the pharma industry a £3.3bn clawback bill, equivalent to more than a quarter of the revenue generated in the country. In response, US giants AbbVie and Eli Lilly quit the scheme and are making sure the rest of the industry knows why.

Let’s be clear, this doesn’t mean AbbVie or Eli Lilly (which make some of the world’s best selling drugs) are no longer supplying to the UK. Nor does it mean that the US giants won’t still have to pay money back to the NHS (companies that aren’t part of the voluntary scheme have to pay clawbacks to the NHS under a statutory scheme). But it does hint at a changing dynamic between the drugs companies and the governments they supply to, one that circles around the age-old problem in the pharma industry: pricing.

Why it matters: Pricing fears for a new era in pharma

And here-in lies the problem.

In the last few decades, pharma companies have thrived off making low-tech drugs which can be used to treat enormous patient populations for the rest of their lives. For example, GSK (LON:GSK)'s best ever selling medicine of all time is Advair - one that you’d probably recognise from its blue inhaler delivery mechanism. Between 1992 and 2017 it generated almost $70bn in global revenue. The top selling medicine of all time is AbbVie’s Humira, used to treat rheumatoid arthritis, and close behind it is Lipitor, Pfizer’s cholesterol-busting medicine. Both drugs have generated over $100bn in revenue for their owners. These medicines are all life-altering for patients suffering with chronic conditions, but they aren’t cures. Pharma companies can continue profiting from them for the entire life of each patient.

But more recently, pharmaceutical companies have been rewarded for finding cures. Companies which are doing incredible things with gene therapy and personalised medicine have seen their share prices (and profit margins) soar, while those which continue to cling on to the old way of doing things are left behind.

The trouble is that personalised medicine can’t be delivered to massive patient populations and many of them are one-time-things, designed to eradicate the disease forever rather than help manage the symptoms. Thus, to make the investment worth it, pharma companies are sticking enormous price tags on their new medicines. For example, in November the US Food and Drug Administration approved a one-time treatment for a rare blood clotting disorder with a $3.5m price tag.

For the national governments which negotiate prices on behalf of big healthcare systems, these prices are becoming challenging, especially as they are facing pressure to cut costs elsewhere. Even the US - a goldmine for the pharma industry - has recently introduced mass pricing negotiations for patients covered by Medicare.

Pharma companies argue that countries which aren’t willing to pay up for the best new medicines will see their investment cut, leading to a decline in jobs, innovation and ultimately access to drugs. But if current pricing procedures are starting to make even the US uncomfortable, the pharma companies might struggle when it comes to the negotiating table.

Pricing has always been a cloud which overhangs investment in the pharma industry, but in the era of personalised medicines, the issue has become even more complicated.

Wetherspoons: Fighting to preserve “the ancient institution of pubs”

Tim Martin has fought plenty of battles in the last few years - which is good, because it seems to be something he likes doing. First there was Brexit and the subsequent handling of the UK’s exit from the EU (Martin is a rare example London-based businessman who desperately wanted to leave). The came Covid-19 and the fallout from various lockdowns. Now he’s back to one of his favourite topics: taxation in the pub industry.

Martin - the founder and chairman of pub chain J D Wetherspoon (LON:JDW) - is a divisive character (I have got myself into trouble before for defending his point of view), but surely his most recent crusade is one than many investors agree with. Martin says that the higher taxes on food paid by the pub industry compared to the supermarkets mean that the latter has been able to subsidise the price of alcohol and take market share. In this week’s Christmas trading update he said: “We estimate that supermarkets have taken about half of the pub industry's beer volumes since Wetherspoon started trading in 1979.”

Wetherspoons has bounced back from its lockdown-induced lows, with like-for-like sales in the 25 weeks to 22 January roughly inline with their pre-pandemic levels. But many pubs have failed to recover their business - something that Martin argues could be catastrophic for communities, high streets and the economy. He blames lockdown-induced behaviours (buying beer at the supermarkets while the pubs were closed down) for exacerbating the problems caused by the unfair taxation system.

Martin - along with any pub group investor - has a lot to gain financially for a change in the way the UK government taxes supermarkets. But even those with no skin in the game can surely agree that preserving the “ancient institution of pubs” is a worthy cause.

St James’ Place: Surprisingly strong inflows in a tricky market

My views on St James's Place (LON:STJ) have previously proven another controversial topic (I am not a fan of the fee structure or the way they advertise to novice investors). But their surprisingly resilient annual performance announcement is worth taking a look at, especially when compared to the results of other companies in the investment management space which were revealed this week.

St James’s Place recorded £17bn of gross client inflows in 2022. That’s down on the previous year, but is still an impressive volume considering investors globally pulled $530bn from investment funds in 2022. Chief executive Andrew Croft said it was the second best year ever for new client inflows. Quite a contrast to US ETFs giant Vanguard which which reported a 50% decline in new investor funds in 2022.

The St James’s Place announcement also strikes a more upbeat tone than CMC Markets (LON:CMCX) (whose trading update was covered expertly by Graham earlier in the week). That seems unusual - spread betting companies like CMC tend to thrive in volatile markets, while companies that facilitate traditional investment (like SJP) are more likely to struggle. It will be interesting to compare the profitability of the two companies when they announce their full financial results later in the year. As Graham points out, it’s the spread betting part of the business which generates the profits for CMC, rather than its investment platform.

St James’s Place has also provided an update on performance. The net investment return was a £15.4bn outflow in 2022, equivalent to about 10% of opening funds under management. That’s not a terrible performance considering a third of the company’s portfolios are invested in US assets, but I’d be pretty unhappy with such a decline I was paying ongoing fees of 1.9% (the average for investments held in an ISA, not including the ongoing fund fees) and especially peeved if I was a new client who had forked out the initial investment fee of 5%.