Split US congress and Covid vaccines buoy the healthcare sector

The latest trends in the healthcare sector focusing on Worldwide Healthcare Trust, our preferred investment in the area.

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  1. Rob Morgan

Covid-19 has shown us how important a functioning healthcare system is for humanity. The search for vaccines and treatments against the virus has also highlighted the innovative and dynamic nature of the sector. After only a few months of research, the Pfizer Biontech vaccine was recently found to be more than 90% effective in preventing COVID-19 while Moderna’s was 94% effective in early trials, marking a pivotal moment in the fight against the pandemic.

Much is still to be determined in terms of how these potentially successful vaccines, and others, might be administered. The timeline is uncertain as a rollout of this magnitude has never before been attempted. Usually things move very slowly in vaccines, but faced with a global health crisis companies, along with governments, will expedite matters as far as they can. So far Pfizer has said it hopes to deliver 50 million doses to the market by the end of this year and 1.3 billion next year. The logistical challenge with its vaccine is significant given that it requires storage at very low temperatures to prevent deterioration. We also don’t know for how long the vaccine lasts. Nonetheless, recent news has been about as strong as could have been expected in the timeframe, and it gives hope for further vaccines. The AstraZeneca / Oxford University results will be particularly relevant for the UK given the magnitude of government orders.

Despite a warm glow surrounding the healthcare sector as it responds to the crisis, it is important to note that clinical success for vaccines does not necessarily translate to instant profits for the pharmaceutical and biotech companies involved. Many companies have taken government funding and will consequently be expected to plough money back into research and development rather than hand it to investors. However, the lasting effect of the virus will probably be more attention and funding for the sector, especially given aging populations across the world, and a greater focus on general health and wellbeing among society at large.

Perhaps more consequential for the sector overall, though, was the the outcome of the US election. There was a very positive reaction from pharmaceuticals shares in the aftermath of the result becoming apparent as investors interpreted the incoming President Biden and a divided Senate as a recipe for little wholescale legislative change for the next four years. Certainly, the rapid repricing of drugs now and other major reforms such as the increased socialisation of the US healthcare system look like they will be kept in check by political division. This potentially removes a significant headwind that has held back shares in the pharmaceutical and medical care industries, though the issues may resurface in years to come.

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, given the complexities of the sector we would suggest there is scope for specialist active managers to add value. One investment that stands out in this regard is Worldwide Healthcare Trust. This investment 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.

The managers are presently excited that innovation across the sector is “firing on all cylinders” with a huge 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 that is 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. In addition, demographics and greater longevity dictate there will be more patients – and thus spending on health.

The managers see the election of Joe Biden as largely maintaining the status quo for the sector, and that valuations are therefore presently attractive – they estimate that the sector as a whole is trading at a 29% discount to the wider market, a level not seen seen since the advent of Obamacare in the US in 2008. However, they also believe novel drugs and strong pricing power important. Competition for generic drug distribution is intensifying, something highlighted this week by news of a fresh move by Amazon to push further into prescription drugs. They are focusing on areas of innovation in biopharma and in smaller company therapeutic stocks, as well as increasing exposure to emerging markets which now accounts for nearly 20% of the portfolio.

In terms of recent performance, the Trust has had a strong year to date versus its benchmark, the MSCI World Health Care Index. This has primarily been driven by stock selection rather than gearing (borrowing to invest) which was reduced significantly over the course of the year in response to the pandemic, and to zero over the summer. The managers felt it was right to have a bit of ‘dry powder’ going into the US election in order to capitalise on any period of weakness. Now that several vaccines are on the horizon gearing has been increased once more and is presently 12%, still below the high teens seen in 2019. It should be noted that gearing increases risk because it exacerbates the ups and downs of the underlying portfolio.

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 need to always 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.

Our view

We think healthcare is a sector where active management can work well but it requires a level of expertise that few can offer. OrbiMed Capital are one of the leaders in the field of healthcare and biotechnology investment, something 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 Orbimed 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.

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.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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