Ian Cowie analyses the Biotechnology & Healthcare sector.
This sector is also likely to benefit from long-term trends for the global population to become older and wealthier, especially in emerging markets. Both trends tend to boost spending on healthcare."
Healthcare and biotechnology companies hit the headlines during the coronavirus crisis and continue to offer investors important opportunities to do well by doing good. Research in this sector requires enormous sums of money, largely because most new drugs disappoint during rigorous testing and fail to make it to market.
But shareholders willing to accept the risks inherent in providing the capital necessary for pharmaceutical and other medical research can also enjoy rewards when new treatments prove effective. Probably the highest profile recent examples of such success are the vaccines discovered within a year of Covid becoming a pandemic in the developed economies of the West.
Better still, investment companies enable everyone - with or without medical or scientific qualifications - to share the cost of professional stock selection in specialist areas where we may know next to nothing. That’s why I have been a shareholder in Worldwide Healthcare (stock market ticker: WWH), a self-descriptive investment company with more than £2.3 billion assets diversified around the globe, for more than a decade.
This shareholding consistently ranks among my top 10 by value, although its performance has been subdued recently with total returns of 2.6 per cent over the last year, following 36 per cent over five years and a much more satisfactory 279 per cent over the last decade. WWH’s underlying assets include familiar ‘Big Pharma’ businesses such as the British-Swedish giant, AstraZeneca (AZN), America’s Pfizer (PFE) - which was the first company to gain authorisation for a Covid vaccine; and the French blue chip, Sanofi (SAN), alongside less well-known names.
But the top-performing investment company in the Association of Investment Companies' (AIC’s) ‘Biotechnology & Healthcare’ sector over the last one and five-year periods is a smaller rival with £462m assets; Polar Capital Global Healthcare (PCGH). Underlying holdings - including the American giants, Johnson & Johnson (JNJ), and Eli Lilly (LLY), alongside AZN - delivered total returns of 17.5 per cent and 71.2 per cent over the last year and five years, following 183.6 per cent over the last decade.
Meanwhile, the more exploratory International Biotechnology (IBT) remains the sector leader over the longest of these three standard periods of comparison, with total returns of 16.3 per cent; 49.7 per cent and an eye-stretching 345 per cent. I have been a shareholder in IBT since the first spring of the pandemic panic, in April, 2020, when I was inspired by the fact its lead fund manager is Dame Kate Bingham, DBE, probably best-known as chair of the UK Vaccine Taskforce.
Another attraction of this investment company with assets of £313.7 million is that it yields a dividend income of 3.8 per cent. By contrast, WWH pays 0.83 per cent and PCGH yields 0.64 per cent. As you might expect from IBT’s portfolio focussed on the cutting edge of life sciences, its underlying holdings are led by ‘unquoted assets’ followed by less familiar stock market-listed names, such as Horizon Therapeutics (HZNP), Seagen (SGN) and Incyte (INCY).
Which brings us back to where we began. This layman knows next to nothing about most of the underlying holdings mentioned above and I am happy to pay ongoing annual charges of respectively 0.9 per cent and 1.3 per cent at WWH and IBT to gain access to their managers’ specialist expertise. PCGH’s ongoing charge of 0.84 per cent is even lower.
Bargain-hunters may also note that shares in all seven investment companies in the AIC ‘Biotechnology & Healthcare’ sector are trading at discounts to their net asset values (NAVs). The average discount to NAV across this sector is 8.4 per cent.
That may reflect the fact that Covid has caused many people to delay non-urgent or 'elective' medical treatment, to avoid going into hospital while the virus remains a real source of anxiety. Another factor behind currently depressed valuations is several governments’ attempts to curb healthcare spending from recent record highs.
But the sad fact remains that people are unlikely to stop becoming ill or needing treatment, whatever happens to the economy or government policy. As a result, healthcare and biotechnology shares offer some defensive characteristics that may provide comfort to investors who fear a global recession.
More positively, this sector is also likely to benefit from long-term trends for the global population to become older and wealthier; especially in emerging markets. Both trends tend to boost spending on healthcare.
Against all that, ‘Big Pharma’ gets a bad press from people who criticise profit margins among other things. But it wasn’t politicians or journalists who found the Covid vaccines that Imperial College London estimates may have saved 20m lives around the world.
It is a sign of the times we are living through that some famous folk, and others who lack any scientific qualifications, feel free to challenge the World Health Organisation, the US Food & Drug Administration and the National Health Service. Let’s hope Covid-deniers and anti-vaxers are spared the worst potential consequences of their cynicism.
Talk is cheap and opinion is free but medical research remains very expensive. This small shareholder is happy to continue paying for professionally-managed exposure to a specialist sector which is helping to make the global population healthier.
