With Covid-19 dominating – understandably – every sector of the news, the focus on healthcare has never been greater. Companies making everything from vaccines to disinfectant are suddenly having their moment in the sun.
Doctor Paul Jourdan is chief executive of specialist fund manager Amati Global Investors, a company that invests in small to medium-sized companies listed on the UK stock market.
He says the healthcare sector is facing ‘the equivalent of a very accelerated dotcom boom’ where companies with even a whiff of a product that might help treat or prevent coronavirus are rewarded with a huge mark-up in their stock market valuation.
The doc-com boom?: The share prices of some research firms are rising as they seek a vaccine for Covid-19
‘There will be big winners,’ he says, ‘but there will be losers, too.’ Jourdan predicts that healthcare spending as a whole will rise significantly across the globe in the short to medium term.
Furthermore, some traditional restrictions on getting drugs quickly to market may be removed or loosened in the race to create a vaccine – leading to quicker routes to company profits in the longer term.
If you are interested in adding healthcare stocks to your portfolio at this time, it’s important to understand the different types of companies involved in the sector – and how they might be affected by Covid-19.
Big Pharma and biotechs…firms that make up sector
With research scientists popping up everywhere at the moment, it can be hard to understand how the drugs, healthcare and pharmaceutical industries in the UK intertwine. In fact, the fight against coronavirus is being carried out in many different types of establishments.
These include so-called ‘Big Pharma’, such as UK-listed companies GlaxoSmithKline and AstraZeneca, which have large market capitalisations and huge portfolios of drugs for everything from gastric ulcers to cancer.
These giants are seen as slow and steady stocks in defensive investment portfolios as they have guaranteed cash-flow from many commonly used drugs. But they are creating new drugs all the time. AstraZeneca has seen its share price react positively on news that it will test its blood cancer drug Calquence on Covid-19 patients.
Meanwhile, GlaxoSmithKline has teamed up with another big healthcare firm – the French-based Sanofi – to make a Covid-19 vaccine. Apart from these large pharmaceutical companies, there are many smaller biotechnology businesses – often spun out from leading universities.
The drugs they are testing are often at very early stages, and may not even be in human trials at present. Most do not make a profit and rely for success on one of their drugs making it to the market. In many cases, they are acquired by big pharmaceutical companies as soon as they have identified a promising product, rather than carrying out the later-stage research themselves.
There are also healthcare companies making equipment, instead of drugs and vaccines, including testing services and much-needed products such as implants and stents. It’s good to be a manufacturer of ventilator parts or testing reagents at the moment – less good if you manufacture parts for elective surgery: Smith & Nephew, which makes knee and hip replacement parts, recently warned that its results would be hit by the cancellation of routine surgeries as Covid19 sufferers take precedence.
‘Even the healthcare industry is not immune from the global shutdown,’ explains Darius McDermott, managing director of investment fund specialist Chelsea Financial Services. He warns against seeing healthcare investment as a guaranteed shot in the arm for your battered portfolio. He explains: ‘Intractable challenges and obstacles remain.
Before coronavirus, the healthcare sector had issues around rising costs, rapid changes to the models used to deliver care, impacts from climate change and pollution, and massive inequities in access to care. But when the worst of this crisis has passed, we believe the quest to deliver the holy grail of better healthcare for less money will continue. ‘And the investment opportunities will be plentiful.’
Where exactly should I look to invest now?
Dzimitry Lipski, head of fund research at wealth manager Interactive Investor, says the healthcare sector has performed remarkably well in the crisis so far, but has further to go.
He says ‘The healthcare sector has outperformed the wider stock market since the breakout of coronavirus and is at the epicentre of this crisis. Whilst the MSCI World Index is down almost 11.6 per cent over the year to date, the MSCI World Healthcare index is down just 1.6 per cent.’
He adds: ‘After this pandemic, there could be significantly higher spending both by the Government and private sector on healthcare.’
AJ Bell’s Ryan Hughes suggests the XTrackers MSCI Healthcare exchange traded fund
Interested investors have several options if they want to obtain exposure to healthcare stocks. They could look at buying shares in listed healthcare and biotechnology companies or buying healthcare investment funds and stock market-listed investment trusts.
But the cheapest option is a so-called tracker fund or exchange traded fund that tracks the stock market fortunes of the healthcare sector as a whole. Ryan Hughes, of wealth manager AJ Bell, suggests the XTrackers MSCI Healthcare exchange traded fund.
This tracks the 145 largest healthcare companies across the world, with annual charges of 0.3 per cent. He describes it as a sound choice ‘for those that want exposure to a broad range of healthcare companies’.
The fund has generated three-year returns of 31 per cent. For those interested in exposure to larger pharmaceutical companies, many popular investment funds have a sizeable healthcare holding.
Fundsmith Equity, for example, has 25 per cent of its portfolio in healthcare stocks, while many of the funds that are marketed as sustainable are also heavily focused on healthcare. AstraZeneca and Glaxo SmithKline are held in fund Royal London Sustainable Leaders while Royal London Sustainable Diversified has AstraZeneca as a top ten holding.
Both have more than a fifth of their assets in healthcare. Exposure to smaller biotechnology companies looking for a Covid-19 vaccine may require more specialist investments. Oxford BioMedica, which is behind the Oxford University consortium that hopes to have a vaccine ready by September, is a well-established listed company that spun out of the university in 1995.
The shares have risen strongly on the company’s links to the Covid-19 vaccine. They were priced at 428p on March 16 – and are now trading at 724p. But Amati’s Jourdan says that buying into Oxford BioMedica is more than just a bet on a Covid-19 vaccine as the company has a pipeline of other promising drugs and new manufacturing facilities.
Investment trusts with a focus on healthcare companies are another possibility. Lipski, at Interactive Investor, likes Worldwide Healthcare Trust, which holds Chinese vaccine maker CanSino Biologics, as well as Swiss pharmaceutical stalwart Novartis. The trust has generated returns of 37 per cent over the past three years – 65 per cent over five years.
Chelsea’s McDermott likes Baillie Gifford Global Discovery, a global smaller companies fund with 40 per cent of its portfolio in healthcare businesses. He also recommends fund Comgest Growth Europe – among its large holdings is Swiss pharmaceuticals company Roche that is at the forefront of coronavirus testing. The Baillie Gifford fund has recorded returns of 61 per cent over three years and 85 per cent over five.
Equivalent returns for Comgest fund are 25 per cent and 51 per cent. Amati’s AIM Venture Capital Trust includes companies such as Tristel which makes hospital disinfectants and next-generation hand sanitiser product Byotrol – both of which are seeing increased interest due to the crisis. The trust’s shares are up more than 10 per cent since mid-March.
Finally, Jourdan says investors should not forget healthcare companies in the sector that are currently out of favour. Demand for Smith & Nephew’s products, for example, will rebound as soon as the hospitals reopen for non-Covid-19 activity.
Jourdan adds: ‘When looking at the healthcare companies hit by coronavirus ask yourself whether the need for their products has been destroyed or delayed. In this case it is just a delay.’
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