If drug stocks are feeling sickly, last week’s events in the US Congress did little to perk them up. In a landmark vote, the House of Representatives voted narrowly in favour of a revised version of President Obama’s plans to extend healthcare coverage to nearly all Americans.

The Bill was more liberal than that put before the Senate and included a government-backed insurance plan that is unlikely to survive. Even so, the growing consensus is that a unified Bill will be approved by both houses within the next month and that the $900 billion programme, the biggest shake-up of US healthcare since the 1965 creation of Medicare, will receive the President’s signature before the end of the year.

The precise depressive effect of the legislation on the pharmaceuticals sector is difficult to gauge. Collectively, the drugs industry has agreed to spend $80 billion over the next ten years to improve Medicare drug benefits and defray the cost of the Bill. That translates into about 2 per cent of its worldwide sales, but roughly 7 per cent of profits. If the Bill passes, earnings forecasts for the next few years are set to fall by mid single digits.

What is clearer is that valuations in “big pharma” remain stuck near historic lows — cheaper than at the time of the proposed Clinton healthcare reforms of the early 1990s — and that dividend yields (about 5 per cent) are breaching their highs. In the UK, shares in its bellwether constituents — AstraZeneca and GlaxoSmithKline — are among the minority of blue-chip stocks whose prices are lower now than at the start of the year. Their 2 per cent fall since January implies underperformance against a sharply recovering FTSE all-share index of a thumping 24 per cent.

So is now the time to buy? Given that stock markets hate uncertainty, growing clarity over the future shape of US healthcare — which accounts for one-sixth of the US economy — should help to close the discount. There is also the possibility that President Obama’s reforms will prove more benign for drugs industry profits than currently assumed. In simple terms, although there will be short-term costs, the longer-term effect should be to boost sales as an additional 36 million Americans gain access to prescription drugs.

There are other considerations. Last month’s round of third-quarter results from the sector contained little to alarm — albeit that profit growth tended to come more from cost-cutting efforts than rising sales. Further, the ownership of drugs stocks by professional investors remains below historic levels — about 6.8 per cent of their portfolios, against a long-term average of 11 per cent to 13 per cent. That “underweight” position leaves plenty of room for holdings to increase.

Barclays Capital counsels caution — but for reasons related to the sector’s traditional defensiveness rather than politics or its success in developing new products. The investment bank finds that the reputed resilience of pharmaceuticals during economic downturns is borne out by the numbers. Prescription data indicates that the effect on drug sales from tougher times has been limited — only in a clutch of emerging markets, such as Mexico and Russia, where patients fund a high proportion of their own healthcare costs, have there been marked slowdowns in volumes. Last year, the sector’s European constituents produced earnings growth of 4 per cent, against a 19 per cent decline for the continent’s quoted stocks as a whole. Equally, they collectively lost just 13 per cent of their value, against the 47 per cent aggregate decline in European stock markets. Looking as far back as 1973, there have been five periods when drug stocks have outperformed their peers as recession starts to bite.

But the corollary also applies, finds Barclays. As economies emerge from recession, healthcare stocks tend to lack. Since 1973, drugs stocks have typically underperformed by 35 per cent as GDP starts to rise and the closely tracked ISM manufacturing index stages a recovery.

The bank concedes that the end of uncertainty over US healthcare reform is unlikely to make the effect as severe this time around. All the same, Barclays contends that it is the wrong time in the economic cycle to buy drugs stocks — because defensive sectors are only set to come back into favour when government stimulus measures begin to tail off, and cyclical stocks once again fall from favour.

So what of the two FTSE 100 heavyweights? Barclays concedes that AstraZeneca shares remain cheap, but thinks they are likely to prove volatile. Patent litigation surrounding Crestor, the company’s blockbuster cholesterol-lowering drug — and the star of last month’s results — is now entering its final stages. Conversely, Brilinta, its oral pill for heart attacks and strokes — and a perceived successor to Plavix, the world’s second-biggest selling drug — is expected to gain approval in the second half of 2010.

And GlaxoSmithKline? Advair, its asthma drug, still produces 20 per cent of profits; there is scope to spin off its consumer division — much as Bristol-Myers Squibb has done with Mead Johnson — and its Benlysta drug has the potential to become the first new treatment approved for lupus since the 1950s.

But, on balance, says Barclays, although the risks are low, there is little to send the shares higher either.

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