Healthcare: saddled by politics but secular opportunities

Healthcare and biotech stocks have had their best week since the US election. This sector had fallen out of favour among global investors during the lengthy US presidential campaign, saddled by issues around competitive drug pricing and the repeal of the Affordable Care Act. These concerns now appear to be easing on reports that the Trump administration will take a more industry-friendly stance towards competitive drug pricing. Investor sentiment has also been boosted by positive data from various laboratory results, including a treatment for ovarian cancer.
Earlier this year, we initiated a position in healthcare and biotech based on the view that relative valuations versus the broader US equity market were attractive and that investors were being overly pessimistic. We took the view that, ultimately, a Republican president and a Republican-controlled Congress will provide a more corporate friendly environment – via tax cuts and a desire to reduce the regulatory burden – backed up by a powerful healthcare lobby in Washington D.C.

While healthcare will remain a politically charged issue, we expect the longer-term opportunities to outweigh the shorter-term risks, with the sector underpinned by the following structural trends:

Ageing demographics and consumerism

According to the United Nations, the proportion of the population aged 60 and over is expected to nearly double between now and 2050. This would imply increasing levels of spending to treat long-term chronic conditions, such as heart disease, cancer and diabetes. Global spending on health as a proportion of GDP was 9.9% in 2014, according to the World Health Organisation, with some of the largest spending increases seen in the emerging markets as their middle class populations expand, particularly in South East Asia and the Middle East.

New discoveries through technology

The biotech revolution represents one of the most exciting areas of technical innovation. Since the mapping of the human genome in 2000, the development of gene-based therapy techniques has accelerated, particularly in the treatment of certain diseases such as cancer. Scientists are also making far-reaching progress in other areas including stem cell research, innovating organ transplant techniques, and in neuro-engineering, where pioneering treatments are being developed for Alzheimer’s and Parkinson’s. Outside of therapeutics, advancements in diagnostics and imaging technologies are re-shaping how services are being delivered to patients, including remote-based treatments for those with long-term conditions.

It is worth remembering that the life cycle of new product launches is a multi-year/multi-decade process from conception to market. It can be more cost efficient for larger pharmaceuticals to acquire the research and development of smaller biotech companies at the key stage of product development than commit extensive capital from the embryonic stage. In other words, there are opportunities for greater synergies and industry consolidation, which active investors can capture. Investors need to be prepared for volatility, particularly lower down the market-cap spectrum, but the longer-term risk/reward opportunity in healthcare remains diverse and compelling.

Jaisal Pastakia, investment manager at Heartwood Investment Management

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