Go specialist for healthcare sector alpha, says Sweden’s Rhenman
Henrik Rhenman, whose healthcare fund returned about 800% in dollar terms in the decade to 2008, said he believes equity price levels and the outlook for companies in which he invests point to significant potential from the sector over the coming year despite the broader global macroeconomic backdrop.
Factors explaining the outlook include elements of stability in the world’s biggest single healthcare market, the US, as well as a stream of patented new pharmaceuticals coming to market globally that are priced higher than the ones they replace. Then there are the fundamentals of many globally active companies who are continuing to grow earnings, profit and cashflow, but which the market is marking down according to analysis of ratios such as price/earnings (P/E).
Rhenman notes the example of US company Johnson & Johnson which currently trades at a P/E of about 12x, as compared to 33x some years ago. Arguably, however, it is actually a better company today with a more diversified income stream.
On the pharmaceuticals pricing element, Rhenman gives the example of AstraZeneca’s new blood thinner “Brilinta”, which competes with and is widely expecte to replace “Plavix” – which is supplied by Sanofi and Bristol-Myers Squibb. The patent on Plavix is expiring, with prices dropping 85% and expectations of a generic replacement. And yet customers such as Swedish local healthcare authorities are still prepared to pay more for Brilinta today, then they were for Plavix when it was still under patent protection. This is because of a suggested 20% improvement in mortality associated with the new medication. Some authorities, such as the UK’s National Health Service, may be squeezing their budgets and be less keen to adopt newer medicines, Rhenman said, but for most markets it is still the case that people will pay more for a new product that may save more lives with fewer side effects.
Political risk to healthcare sector equity in the US is low in the wake of the reforms initiated there in recent years, he says. Effectively, pharmaceutical companies exchanged volume for price certainty as part of the reforms. There have been price cuts on products destined for the Medicare and Medicaid programmes, but in return the end customer has become arguably less price sensitive because of the development of greater insurance coverage.
And then there is the broadening of the global market. Rhenman said that when he started covering healthcare, the US accounted for about half the global market. Today that figure is down to about 35%, he estimates.