Pharma and biotech in developed Asia has been among the region’s worst performing industry groups in the last year, but our research suggests that their recent underperformance may be somewhat overblown. Recent performance places these companies squarely in the bottom fifth of industry groups for the region, ranked 21 of 24 in absolute percentage terms.

Performance, DM Asia

Developed Asia pharma/biotech stocks have been getting punished over the last year, with 38% of them in correction territory and 44% in a technical bear market. The table below details the share of companies in each industry group and their percentage distance from 1-year highs.

Performance Brackets, DM Asia

The industry group’s valuations are particularly low. Price-to-cash-flow now sits in the single digits. The following shows adjusted valuation ratios, after we adjust for intangible assets and innovation investments using our proprietary methodology for measuring innovation intensity.

Intangible-Adjusted Valuations, DM Asia

The likely catalysts for this drawdown are twofold. First, while changes to this year’s sales estimates have been positive for the industry group, it has been subject to some not-so-encouraging earnings estimate revisions in the last few months, especially compared to other groups in the region. The following shows changes to FY1 sales and earnings estimates in percentage terms.

Sales and Earnings Revisions for FY1, DM Asia

Second, pharma/biotech companies are getting more miserly toward their investors. Almost two-thirds of them cut dividend payments to investors, as shown in the table below.

Companies Cutting and Raising Dividends, DM Asia

Their cash flow allocation in general is not geared toward bolstering share price, at least not directly. Developed Asian pharma/biotech companies put only 11% of their operating cash flow into equity payouts on our intangible-adjusted basis, placing the industry group solidly in the bottom quarter of industry groups for this metric.

Shareholder Cash Flows, DM Asia

Instead, these companies lead the region in R&D spending as a percentage of sales, as detailed below. Per our adjusted data, their capex as a percentage of sales ranks second only to REITS in the region.

Tangible and Intangible Capital Investment, DM Asia

In fact, we now rank DM Asia pharma/biotech stocks as the highest quality group in the region. Our analysis places these companies among the healthiest, most liquid, solvent, and profitable companies among their peers. These scoring factors are shown in the table below from 0 (lowest total quality) to 100 (highest) and put the group’s lead in quality at 29 points above the region average.

Knowledge Leaders Quality Composite Score, DM Asia

This contrasts sharply with the valuation scoring, which puts this industry group among the most undervalued in the region. Pharma/biotech companies rank third according to our scoring system, with 0 representing the most overvalued and 100 the most undervalued.

Knowledge Leaders Valuation Composite Score, DM Asia

DM Asia pharma/biotech companies in have seen a resurgence in the last few weeks, notching gains of a bit over 5% on average, suggesting investor sentiment surrounding them has started to shift. The industry group is still in a technical uptrend as well. Three quarters of constituent companies have 50-day moving averages above their 200-day MAs.

Percent of Companies with 50-Day Moving Average Above 200-Day Moving Average, DM Asia