The healthcare megatrend has led many to buy into the pharmaceuticals sector, but investors need to keep an eye on sustainability to pick the best names, warns Sarasin, the Swiss banking group.

Demographic change, increased investment in healthcare and the steady rise of the middle classes in emerging economies all bode very well for the pharmaceutical industry in the coming decades. But, according to Sarasin, poor marketing practices may ruin the prospects of many companies.

The firm notes that unethical or illegal marketing practices are a widespread problem in the industry, and that this is most marked in the US – the most important “battleground” internationally for pharma companies. There, the struggle for market share has led to some very unsavoury practices such as "off-label marketing" (promoting uses of the drug for which no approval has been given), lack of transparency regarding potential side-effects, price manipulation and corruption, Sarasin says. Moral objections aside, the problem for investors is that dubious marketing practices can lead to very damaging court cases – and massive financial penalties – for the firms concerned.

It should be remembered here that we are not talking about unknown firms, but rather household names which investors might confidently plough significant money into.

This summer Glaxo SmithKline, the UK’s largest drugmaker, was fined an eye-watering £1.9 billion (around $3.0 billion) to settle drug mis-selling charges brought by the US Justice Department. In fact, Sarasin highlights that over the past five years such court fines and settlements in the US have already amounted to $25 billion for the industry. It should be noted however that some firms, such as Roche, have already made good progress in preventing such practices, the bank says, while others like Glaxo have also been forced into some soul-searching by high-profile litigation.

According to Sarasin, one area where it is important to examine firms’ practices is how they market their products in emerging market countries; this is particularly pertinent as emerging markets will account for half the global growth in demand for pharmaceutical products up to 2015.

Sarasin argues that the best way to select pharma names is through sustainability analysis, since this makes it possible to identify top-quality companies that reduce risks and/or take full advantage of the relevant opportunities available to them.

On the basis of such an analysis, Sarasin says that European pharma names are the most attractive and it singles out Novo Nordisk and Roche as having particularly high scores. Both showed excellent performance in the areas of business ethics (marketing, competitive conduct), access to medicines, product quality/liability and the environment, the bank said.

However, that is not to say that there aren’t any attractive non-European stocks for investors to think about: in South Africa, the pharmaceutical company Aspen is the biggest producer of drugs for treating HIV/Aids, and another “very progressive” firm is Genomma Lab, Mexico's biggest producer of over-the-counter medicines.

Progressiveness clearly translates into profitability for investors, Sarasin concludes. According to the bank’s analysis, over a three-year examination period the shareholder return of the stocks of pharma and biotech companies currently rated as “sustainable” was approximately 50 per cent, compared with a market return (MSCI World World Pharma/Biotechnology) of about 30 per cent.