What are the prospects for 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

Despite turbulent economic times, the healthcare sector is one area with huge structural tailwinds behind it. Demographics and greater longevity dictate there will be more patients – and thus spending on health. Meanwhile, we are living in an era of unprecedented medical innovation. Developments of drugs and therapies have the potential to improve and prolong the lives of people on a scale never before seen.

Yet the risks are also significant. Despite high rates of drug approval the path to development and commercialisation is strewn with failures. A passive approach of investing in all the major pharmaceutical and biotechnology companies is one way to try and capture the opportunity while spreading risk, but a superior way may be to use an active fund manager with specialist expertise. There is one investment that stands out to us in this regard: Worldwide Healthcare Trust.

The 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 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 excited about a ‘golden age’ of healthcare innovation, with a huge variety of new technologies being created for unmet medical needs as well as a rapid pace of approval and commercialisation. They suggest valuations across the sector remain attractive, having been depressed by concerns over reductions in drug pricing, a perennial political hot potato in the US, and the subject of one of president Trump’s campaign promises. The managers are relatively sanguine on this topic, feeling that Mr Trump tends to favour pro-business solutions and is unlikely to stymie an important and innovative industry. They feel the most likely outcome is Iegislation that balances helping patients, including through more drug approvals, without unduly hurting the industry.

Volatility has also hit the sector owing to ‘Medicare for All’ proposals from potential Democrat candidate Bernie Sanders. These involve a government-run plan guaranteeing coverage for US citizens that would replace the current job-based and individual private health insurance system. This would potentially be very damaging for medical insurance providers, and drug companies and healthcare providers would likely come under considerable pressure in terms of pricing. The team doubt this will to come to pass as there are too many hurdles, pointing out Mr Sanders hasn’t yet won the Democratic nomination, let alone garner enough support from fellow Democrats.

During 2019 there have been several shifts in the portfolio worth highlighting, and which generally add to the return potential and the risk. A number of steps have been implemented in order to increase conviction, such as increasing percentage weightings in best ideas, reducing the number of holdings to increase concentration, and increasing allocation to small and medium-sized companies, areas that have historically added the most value for the team. It is also interesting to note that emerging markets have grown to represent around 15% of the portfolio, with the managers noting the improved regulatory regime for Chinese drug approvals.

In terms of recent performance, the Trust’s relative lack of exposure to large pharmaceutical companies was somewhat costly towards the end of last year when this area’s defensiveness characteristics came to the fore. So far this year the trust has performed well, particularly in the initial rebound of January and February, though a high conviction position in Takeda Pharma has been unhelpful. The team see Takeda as a ‘significantly mispriced asset’ on a very depressed valuation, with lots of benefits still to flow from a takeover of UK business Shire.

Owing to the fact that the Trust invests across various types of biotech, pharmaceutical, healthcare services and equipment companies, it tends to escape the worst of the volatility experienced by 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 of the Trust; although past performance is not a guide to the future.

We maintain confidence in the highly experienced investment team and 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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