It may seem baffling that the area of the market that has done most to help us overcome Covid-19 — healthcare — has struggled in investment terms.
Look at AstraZeneca. One of the heroes of vaccine production, it is up 3 per cent over the past year, compared with the FTSE All-Share up over 18 per cent. It’s a similar story for other big pharmaceutical companies. Pfizer, in the US, is up 22.5 per cent, against almost 38 per cent for the S&P 500.
It’s not just a handful of Big Pharma stocks that have lagged behind. In the year to the end of May the MSCI World Healthcare Index was lapped by the MSCI World Index — up only 18 per cent versus 41 per cent for the broader index.
We have seen this sort of underperformance before — in 1993, when Hillary Clinton sought to clamp down on drug pricing during husband Bill’s presidency, and in 2009 when Obama signed into law the Patient Protection and Affordable Care Act. Neither effort suppressed drug prices and healthcare equities rebounded.
Today’s Democrats are once again determined to bring down the price of medicines. They are trying to push bills through Congress to give Medicare and Medicaid more strength to negotiate with pharmaceutical companies.
Two House committees are investigating a controversial decision by the US Food and Drug Administration to approve a new Alzheimer’s drug called Aduhelm that has had mixed results and yet costs $56,000 a year per patient.
The issue of pricing is weighing heavily on the share prices of manufacturers, who argue that for every drug that succeeds many more fail, so they need high margins.
Despite this issue, there is a lot to excite investors in the healthcare sector. Biotech advances like those that led to the rapid development of mRNA coronavirus vaccines are happening in several areas.
Jennifer Doudna, who won the 2020 Nobel Prize for her work on gene editing and spoke at the recent FT Weekend Festival, is associated with two companies: Intellia and Caribou (soon to float); her collaborator, Emmanuelle Charpentier, co-founded CRISPR Therapeutics.
Two weeks ago, Intellia announced positive early trial results for a gene-edited treatment for the liver disorder, TTR amyloidosis. It was a world first for the technology but, without current products and current income, the shares are near impossible to value.
The market is excited about prospects in this area for treating more common genetic disorders such as sickle cell disease and haemophilia. Many big pharmaceutical companies have their own programmes of research (we like Roche particularly).
But don’t assume gene editing will necessarily yield rich rewards for Big Pharma. The science behind it is not always exclusive. It may just enable more companies to develop competing successful treatments, in the same way as we have several vaccines now. And consider that new drug discoveries may simply replace older drugs and, therefore, existing income streams.
Another more established area is immunotherapy, where the body’s immune system is manipulated to deliver effective treatment. One of the most successful medicines of recent times is Merck’s Keytruda. It blocks proteins made by some cancers that switch off the parts of the immune system that would otherwise attack them. It has revolutionised treatment of skin cancer and some breast cancers. It is not cheap. But it has fewer side effects than chemotherapy or radiation and this can reduce the overall costs of care.
And here lies one of the key considerations for investors eyeing the sector and sensing a bargain. Look at whether companies are helping to cut healthcare costs.
This need not be sophisticated technology. My colleague Cormac Weldon, who specialises in US equities, holds Amedisys, a home help business that delivers pre- and post-operative physiotherapy care in the home for much less money than it costs in a hospital or outpatient clinic.
The pandemic has accelerated many trends, especially the adoption of new technologies and working practices. One company we have held before is Teladoc, which enables phone or video consultations with medics in North America. Two years ago the thought of a remote consultation would have seemed far from ideal. How times change.
Public health requires co-ordination across hospitals, surgeries, pharmacies and, increasingly, care homes and social services. We are seeing much more willingness to embrace technology for this as well as to help with more mundane issues like booking GP and consultant appointments, ordering prescriptions and even doing staffing rotas (a remarkably complex task in a hospital).
In future, we are likely to need more hospital capacity while we wait for vaccines to be rolled out. One stock that we have owned before, when valuations were lower, was Stryker, which makes hospital beds (as well as replacement hips and knees, for which we expect demand to rise as hospitals get back to normal).
I have left until last the area that we find most attractive: testing. Liquid biopsy is a growth area. It offers medics the chance to diagnose illnesses more accurately and quickly from blood, saliva or urine samples, doing away with the need for invasive surgery. Two companies we have long held that should benefit from this are Illumina and Thermo Fisher. They both manufacture equipment sophisticated enough to identify different Covid variants.
Another provider that can do this is Oxford Nanopore, which is preparing to come to public markets soon. Indeed, its technology may be more advanced than that of the current leading players.
No financial information is available to enable me to judge whether it offers reasonable value. Illumina also recently moved to acquire Grail, a leader in diagnostics for cancer. The fact the deal is awaiting competition approval in the US demonstrates how the big companies are expanding their capabilities in this area.
Though these scientific supplies companies look expensive, they have strong top-line growth, fat margins and a lot of repeat business. We believe they will deliver solid returns, but I admit they are not the ten-baggers some readers want.
The astute investor might find these in the earlier stage biotech sector, where new discoveries and technologies are being developed, but picking the right stocks there is a specialist job and comes with risk. Lots of it.
I hope I’ve shown that for prudent growth investors who are prepared to do their research, healthcare still offers diverse pockets of promise. The sector has had a tough time but maybe, like us, it is emerging to a brighter future.
Simon Edelsten is co-manager of the Mid Wynd International Investment Trust and the Artemis Global Select Fund.