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Five rated managers reveal biggest healthcare opportunities

Citywire-rated managers highlight the challenges and opportunities investors face in the healthcare sector.

Checking the pulse on healthcare

Healthcare is becoming an unpredictable market for investors. The recent US election campaign triggered a collapse in biotech and healthcare stocks following Hilary Clinton’s much publicised tweet about price controls. While the healthcare sector seems to be making a full recovery, the possibility of government intervention is never far away.

The UK’s NHS is under pressure and the US’ Obamacare programe is on the verge of being dismantled, so what bearing does this have for investors in the sector? Which areas look set be fighting fit and are there some parts of the market running out of puff? We asked Citywire-rated fund managers to run their stethoscopes over the market.

This article originally appeared in the July/August edition of the Citywire Selector magazine.

Tapping China

Despite noise surrounding the US and the UK, Nordea’s Jorry Rask Noddekaer said the team is witnessing particular value in the Chinese healthcare space.

'China’s demographics and its aging society is a major part of our narrative, but there is also the growing middle class that is demanding improved services. We currently like a number of stocks in this space, such as China Resources Pharmaceutical Group, Sinopharm, and China Medical System Holdings. The government is listening to the people and is willing to spend more and increase budgets to meet growing costs for treatments.

'This spending goes hand-in-hand with the rise of insurance take-up. The insurance industry is growing rapidly and individuals paying the costs of this are demanding quality healthcare. Insurance companies are also ensuring patient treatments are of a high standard. Ping An is one name we like in insurance, which has a strong position in a number of markets.'

Citywire + rated Noddekaer, who runs several funds including the Nordea 1 – Emerging Markers Focus Equity fund, said there is also opportunity across the healthcare value chain, as the services and equipment market is highly fragmented.

‘There is a major drive to consolidate this market, as smaller operators are struggling to keep up with requirements like quality control and compliance. This is a strong structural growth area and for well-positioned companies and could mean a potential doubling or tripling of share prices over the next five to six years.’

Government free

Candriam’s Rudi Van den Eynde, who runs the Candriam Equities Biotechnology fund, said the last 18 months has been a challenge for most drug companies, whether that be classical pharma or biotech-oriented.

‘The heated discussion about drug pricing in the US has taken its toll. We think that in the end, innovative drugs will still see strong pricing as innovation is bringing great breakthroughs and none of the political elite wants to stop this drive.

‘Obviously, something has to give for health insurance systems to remain solvent, and we believe that biosimilars will be promoted more and enjoy a clearer regulatory framework in the US and in Europe, where they are slowly gaining market share.’

Therefore, Citywire A-rated Van den Eynde said only the more innovative drug companies will thrive, while those that still rely on old drugs close to, or even past, patent life will find the future more troubling.

‘Within healthcare, medical technology has been isolated from the controversy and has handsomely profited from this safe-haven role. Medical technology is mostly purchased by hospitals and so is free from any direct government intervention.’

Policy shakeups

Citywire AA-rated Vinay Thapar, who runs the AB SICAV I-International Healthcare fund said he expects there to be winners and losers in the healthcare sector due to policy changes.

‘Over the long-term, shake-ups to healthcare policies are likely to disproportionately affect companies that don’t operate in an efficient manner including those that have made excessive price increases.

‘We construct our portfolio to be agnostic towards macroeconomic, political and policy decisions and focus on companies capable of generating a return on invested capital while creating value for the healthcare system.’

Thapar said the team if of the belief that surgical robotics, population health – using big data to drive better clinical decisions for patients – and diagnostics remain an interesting technological advancement to monitor.

‘All three of the above have the potential to drive better outcomes for patients, while benefiting the companies responsible for the technology at a reduced cost to the healthcare system.’

Healthcare remains healthy

Despite political noise and some rogue individual system components having created a broadly-based misconception among investors, AA-rated Stefan Blum said the fundamental factors of the healthcare sector have been and will remain in very healthy shape.

‘Innovation that satisfies clinical needs and delivers economic value gets rewarded and overall healthcare demand is steadily growing due to the global demographic trends like aging, unhealthy ‘westernised-lifestyles’ and rising wealth. Investing in the healthcare sector has become much more demanding. The tide doesn’t lift all boats anymore, which has a huge impact on how to invest in the space.’

Blum, who runs the Bellvue Adamant Medtech fund, said the team invests in ‘medtech’ and services, basically everything in healthcare apart from drugs.

‘The business models carry less binary risk and aren’t exposed to the perceived price risk of pharma. Generally, these are ‘normal industries’ with decent price pressure but strong innovation and product pipelines. The very services and logistic-intensive nature of the businesses favours big incumbents and drives consolidation, creating a massive ongoing M&A wave.

‘Device companies tend to expand into services supported by health tech innovations like body sensors, smartphones, cloud and big data that enable completely new business models and offer huge potential for growth.’

Selectively sighted

While healthcare remains a fertile area for stock picking, given accelerating disruption and innovation, AAA-rated Dave Eiswert said the team has been watchful as richer valuations have started to emerge in segments of the sector.

‘Within healthcare, we remain selectively overweight biotech and pharma. Our holdings include Sino Pharmaceuticals, one of the highest-quality pharmaceutical companies in China. We think the company will be able to produce strong earnings growth over the next few years through its large and sophisticated sales network and industry-leading research and development.

‘The company also has attractive exposure to fast-growing therapeutic areas such as hepatitis and oncology. We also have a core holding in Shire, a Dublin-based speciality pharmaceuticals company, which has one of the deepest portfolios and pipelines in rare diseases.’

Eiswert, who runs the T Rowe Global Focused Growth Equity fund, said Shire’s acquisition of Baxalta further diversifies its portfolio, doubling its size and breadth with three new platforms and bringing stable cash flow to drive its strategic growth plans through 2020 and beyond.

Related Fund Managers

Rudi Van den Eynde
Rudi Van den Eynde
8/23 in Equity - Biotechnology (Performance over 3 years) Average Total Return: 12.40%
Stefan Blum
Stefan Blum
3/88 in Equity - Pharmaceuticals & Health Care (Performance over 3 years) Average Total Return: 38.57%
Vinay Thapar
Vinay Thapar
14/88 in Equity - Pharmaceuticals & Health Care (Performance over 3 years) Average Total Return: 29.23%
Jorry Rask Nøddekær
Jorry Rask Nøddekær
51/217 in Equity - Asia Pacific Excluding Japan (Performance over 3 years) Average Total Return: 31.57%
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