Gemma Game of AXA Framlington Health Fund sees consolidation, innovation driving values in sector
Gemma Game, manager of the AXA Framlington Health Fund, sees consolidation and innovation creating value in the global healthcare sector.
The long term drivers of demand for healthcare are intact, such as a globally ageing population, the obesity pandemic and increasing investment in emerging markets. In addition, short term trends are supportive and offer value opportunities. Economically sensitive areas of healthcare should recover with the strengthening macro environment, M&A activity is at very high levels and innovation continues apace in areas such as immune-oncology. The removal of headwinds such as the pharma patent cliff and additional volume from healthcare reform should lead to improved fundamentals and sustainable performance.
Sharpened focus on innovation
Most of the mega cap pharmaceuticals companies have now weathered their patent cliffs and are emerging leaner and with a sharpened focus on innovation. There are breakthroughs in therapeutic areas which are set to drive a paradigm shift in the treatment of diseases. For example, the treatment of cancer is evolving rapidly with the emergence of immunotherapy, the treatment of a disease by harnessing the body’s own immune system. Treatments such as Yervoy, which is used for metastatic melanoma, have effectively transformed a previously fatal cancer into a chronic disease.
Companies at the forefront of immune-oncology are large cap pharmaceutical companies such as Roche, AstraZeneca, Merck and Bristol-Myers Squibb, all of which are investing heavily in R&D. Market potential is estimated to be above $30bn, and immunotherapies have the potential to be used in 60% of all tumours. However, innovation is not restricted to the large cap pharmaceutical companies and is abundant in the medical devices and biotechnology industries as well.
Fundamentals in the healthcare sector globally are improving. In the US, the biggest healthcare market, healthcare reform, commonly known as ‘Obamacare’, is set to bolster growth in the sector from circa 4% in 2009-2012 to circa 6% in 2014-2022. With over 8 million patients enrolled in the newly formed program so far, the benefits of healthcare reform have become more tangible. Industries that stand to gain include the hospitals, pharmaceutical distributors and retail pharmacies.
Valuations are historically fairly low and with so many long and short term market drivers, we see potential for the healthcare sector to trade on higher valuations. The sector is not cheap across the board however, for example valuations have become toppy in some areas of biotech, but there are still selective opportunities in the space.
2014 – the year of consolidation
With the political overhang of healthcare reform much diminished, and valuations below their long term averages, a wave of consolidation can be seen rolling across the healthcare sector. Companies are taking advantage of low interest rates and cheaper debt, as well as the potential benefits from tax inversion following an acquisition to lower their tax bills. There has been a year’s worth of M&A from January to April alone, with consolidation in medical devices, healthcare services and even large cap pharmaceuticals with Pfizer’s (as yet unsuccessful) bid for AstraZeneca.