Shares: Health care out of the sickbed

HEALTHCARE stocks on both sides of the Atlantic have been desperately out of favour in the past 18 months. Between January 1992 and low points in July and August of this year, Glaxo and Wellcome shares fell by 44 per cent and 52 per cent respectively.

Those are full-scale bear markets, which I believe are now over. There has already been a useful recovery in prices, with Glaxo at 700p and Wellcome at 786p, but that is nothing in the context of massivelyrising global demand for better health care. It looks an excellent time to build a portfolio of health-related stocks for sustained capital growth (and pretty good income) over the next few years.

The nine shares I would choose are Zeneca at 797p, Glaxo at 715p, Wellcome at 845p, Amersham International at 881p, nursing homes group Westminster Health Care, at 357p, Glaxo's spectacularly fast-growing Swedish rival, Astra, at pounds 15, innovative medical products concern Huntleigh Technology, at 483p, Smiths Industries, the specialist engineer whose growth and acquisitions have made the medical side the biggest contributor to just-reported profits, at 399p, and finally, for some speculative spice when dealings begin, a stake in Scotia Investments, a company with a potentially exciting pipeline of drugs based on evening primrose oil. My nap selections would be Huntleigh, Astra and Smiths Industries.

One reason for the change in sentiment towards the sector is that the sharp decline made the majors attractive on income grounds. G1axo, with a huge cash mountain, has decided it can pay out more of its earnings in dividends.

The historic yield is nearly 4 per cent and some analysts believe the dividend could climb at nearly 20 per cent for each of the next two years. Zeneca yields 4.4 per cent historically with perhaps an 8 per cent increase in prospect for the current year.

Wellcome, on a historic yield of 2.1 per cent, is hardly an income stock but Wellcome, Roche and Astra have been selected by analysts as the three large European pharmaceutical companies likely to produce the greatest growth in sales volumes in coming years. Wellcome is the world leader in the treatment of viruses in an epoch described as 'the golden age' for viruses, because of increased international travel. That will surely generate good returns for shareholders.

Astra is a phenomenon. It has two blockbuster drugs in Losec, for treating ulcers, and Pulmicort, delivered through its proprietary turbohaler technology, for treating asthma. These drugs, and a US marketing agreement with Merck, which may become a full joint venture next year, are driving spectacular growth. Recent figures showed that in the first half of 1993 sales rose by 38 per cent and earnings rocketed by 75 per cent. That sort of progress looks set to continue with neither of these drugs near maturity. The rating is high but should come down to 20 on full-year forecasts, which is hardly demanding for a company expected to replicate in the 1990s Glaxo's meteoric growth in the 1980s.

Huntleigh Technology is tiny by comparison but also looks to have spectacular prospects. Sales and profits have soared in recent years, based on the group's ability to create and to market innovative and cost- effective products for the non- invasive treatment of bed sores, for reducing the risk of post-operative thrombosis, and for monitoring blood flow and foetal health with hand-held ultrasound equipment.

Last week the group launched a new 'intelligent' range of bed sore prevention mattresses to a show-stopping response. Earlier in the year it added a product to assist in keyhole surgery to its ultrasound range. Morale is understandably sky-high and the shares have already recovered most of a near-20 per cent dive as profit-takers moved in after the interims 'only' produced a 31 per cent increase in earnings and a 50 per cent rise in the dividend.

Smiths Industries does not quite fit in with the others in that less than half its total profits come from health care, although the division has overtaken aerospace as the major contributor. Growth has been rapid - both organically and from acquisitions. The company supplies disposables such as tubes for use in surgery and snap-on heads to prevent accidental injuries from needles.

It also has a range of capital equipment products including sophisticated electronic operating tables. It is strong in Japan and the Pacific Rim as well as in the US. The aerospace side has been held back because it has had to spend more on research at a time when demand has been depressed. In the shortrun, aerospace prospects look unexciting but a powerful recovery is expected in mid-decade as Boeing's new generation of aircraft, such as the two- engined Boeing 737, come on stream.

There is also a growing industrial division supplying equipment such as extractor fans. As a long-term investment in widely applied engineering excellence, Smiths Industries looks hard to beat.

(Photograph omitted)