Share tip of the week: oversold pharmaceutical stock

Big pharma is out of favour, but the sell-off looks overdone, says Paul Hill. And this stock looks like a looks a reliable income play

Wall Street used to love Big Pharma. In the late 1990s, stocks in the sector often traded on earnings per share (EPS) multiples of around 20. But not anymore. The US healthcare sector is trading on 2011 p/e (price/earnings) ratios of below 12. This seems odd, given that, for the next two years, profits are expected to rise on average by 10% a year.

So why has pharma fallen out of favour? It's partly due to US president Barack Obama's health reforms and the threat from cheaper generic drugs as patents expire. Also, tighter regulation means it's becoming harder and dearer to launch new treatments. And while total spending on the sector has climbed, governments, hospitals and patients are reaching the limit of what they can afford to pay.

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Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.