Although the technology sector tends to get the most attention from investors looking for growth opportunities, healthcare is a similarly innovative area exposed to some exceptional, enduring trends. What’s more, it appears to be fairly cheap bearing in mind the potential growth on offer, which is primarily a result of some political fog in the US that may, at some point, clear.
What is the opportunity in healthcare?
The key structural driver behind the sector is growth in patient numbers, spending and drug approvals. The world will have 1 billion more elderly people by 2050, which means more government and private provision. A growing middle class in the developed world is also likely to add substantially to the numbers of patients and worldwide spend. At the same time, the industry is producing cures, treatments and technologies at a faster pace than ever before – so it is well placed to meet the growing demand.
Despite the potential, valuations across the sector are at historic lows versus the broader market. Orbimed Advisers, managers of the Worldwide Healthcare Investment Trust, calculate a discount of around 27% within the US stock market, a level not seen since the advent of ‘Obamacare’ in the US in 2008 when the market was concerned that drug pricing controls would reduce profitability and stifle growth and innovation.
Similar concerns hang over the market today with President Joe Biden keen to reform the US healthcare system. The warm glow surrounding the sector amid the successful search for Covid 19 vaccines seems to have worn off despite its huge success in showcasing the innovative and dynamic nature of the sector.
Yet a rapid repricing of drugs or other major reforms such as the increased socialisation of the US healthcare system look like they will be kept in check by political division – the margin held by the Democrats is very narrow. As Orbimed’s Trevor Polischuk points out, President Biden has shown he wants to get things done and leave a legacy, but he will need to build a political consensus. He believes Obamacare may be expanded, but it won’t be fundamentally overhauled in favour of more socialised healthcare. As such, he suggests markets are overly discounting a more draconian scenario.
If that’s the case, and a funding scheme is unveiled that reduces costs to consumers without impacting drug pricing too much, then it would alleviate investor concerns significantly. It could give a lift to the whole sector, which appears to have been held back by uncertainty. Other potential positive drivers are the deep pipelines of drugs, rapid rate of approvals and a potential re-acceleration of merger and acquisition activity if valuations remain modest.
Finding the best opportunities
The Trust’s managers are presently excited about a “golden era” for the sector with innovation being the key driver of value creation. Alongside favourable demographic trends, there are a variety of new technologies being created for unmet medical needs as well as a rapid pace of approval and commercialisation. Given the rate of development possible, illustrated by the rapid response to Covid-19, new drugs and therapies have the potential to improve and prolong the lives of people on a scale never before seen.
Mr Polischuk points to oncology being the most exciting space within the sector, both in terms of improving patient outcomes and investment opportunities. Immuno oncology – drugs that stimulate the bodies own immune system to fight cancer cells and destroy tumours – is a relatively new class of treatment but has experienced sales growth of 20% over the past year and this is anticipated to accelerate. Many of the pharmaceutical majors such as AstraZeneca, Bristol Myers Squibb, Merck and Novartis provide exposure, and together these represent around 20% of the current portfolio.
There are also more specific therapies in oncology targeting specific cancer-causing mutations with increased efficacy. Around 10% of the portfolio is dedicated to these, including Deciphera, Mirati, Turning Point and others.
A further theme the managers are keen to harness is Liquid Biopsy, a ‘new frontier’ in diagnostics-which detects disease using blood draw rather than a more invasive and time consuming process of tissue sampling. Benefits include easier, and thereby potentially earlier, detection and simpler monitoring for relapses. Natera, Burning Rock, Guardany and Caris Lide Sciences are among the directly-related stocks held by the Trust, and this segment accounts for around 10 % of the portfolio.
There are also growing opportunities in emerging markets according to Mr Polischuk, given that populations in these nations are becoming processively wealthier and older. He is also reassured that in China the regulatory environment is improving. To capitalise, the team currently have around 17% in emerging markets, much more than the benchmark index, and are focused on finding ‘blue chip’ companies that will likely lead in their respective areas for a long time, as well as taking advantage of new opportunities coming to market through IPOs.
Our view on the Trust
While a passive approach of investing in all the major global pharmaceutical and biotechnology companies is one way to try and capture opportunities while spreading risk, the complexities of the sector means there is scope for specialist active managers to add significant value. Worldwide Healthcare Trust stands out in this regard.
The Trust has been managed by New York-based OrbiMed Capital for nearly 25 years. OrbiMed are the largest dedicated healthcare investment firm in the world with around 80 investment professionals. In our view, the depth of resource upon which they can draw in terms of medical and investment expertise, longevity in the sector and network of industry contacts is impressive.
OrbiMed’s specialist expertise is borne out in the strong track long term track record; although past performance is not a guide to the future. The Trust is the ideal vehicle through which the team can showcase the firm’s best ideas, including a small allocation to private assets, and we believe it can continue to exploit the demographic, socioeconomic and technological tailwinds that the healthcare sector enjoys.
In terms of recent performance, the Trust has had a further strong year to date versus its benchmark, the MSCI World Health Care Index. This has primarily been driven by stock selection alongside some tactical of gearing (borrowing to invest), which having been reduced last year in response to the pandemic was increased to 12% by the autumn and currently stands at 2%. It should be noted that gearing increases risk because it excacerbates the ups and downs of the underlying portfolio, and that past performance is not a guide to the future.
Owing to the fact that the Trust invests across various types of biotech, pharmaceutical, healthcare services and equipment companies, it tends to be less volatile than pure biotech investments such as Biotech Growth Trust, which is managed by the same team. However, investors still need be aware of the high level of regulatory and political risk all across the sector, notably surrounding the drug approval process, which can cause rapid price movements.
We continue to view the Trust as an attractive option for adventurous investors looking to harness the growth potential of this complex, fast-changing and higher-risk area. Shares currently trade close to net asset value, and it remains part of our Foundation Fundlist of preferred investments across the major sectors.
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