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Healthcare sector investing is on the cusp of change – Business Times

Posted: June 11, 2020 at 12:53 pm

Wed, Jun 10, 2020 - 5:50 AM

THE world is engaged in a war against Covid-19 - and the health sector is on the front line. The good news is that the race to develop treatments for Covid-19 has been remarkable for both its speed and scale, according to the Vaccine Alliance, a global health partnership.

So far, companies, scientific groups and institutions around the world have announced efforts to address Covid-19.

Signs of resilience

Healthcare has both been one of the strongest performing sectors over the past few years, and one of the most resilient so far during the Covid-19 crisis.

That healthcare has been relatively resilient is, to an extent, to be expected: After all, individuals still need to seek medical care, even in a recession and health needs become amplified during these times.

In fact, the US healthcare sector has outperformed the market in recent months but also over a longer period.

For example, the S&P US healthcare returned 4.3 and 34.9 per cent in the past six months and three years, respectively, while the general market was down 3.1 and up 25.3 per cent respectively.

Bifurcation of performance

But healthcare faces some headwinds too - meaning there could be some short-term volatility for the sector. Social distancing is having significant economic ramifications, and healthcare companies have not been completely spared. Healthcare providers have been the hardest hit in the sector as almost all elective activity has been suspended to focus on containing and treating Covid-19

The pandemic's effect on healthcare stocks through the first quarter of 2020 has been varied. Performance within biopharmaceuticals was bifurcated. Companies expected to play a role in either developing or partnering to deliver a Covid-19 therapy or vaccine outperformed significantly.

At the same time, many innovative small-cap drug stocks underperformed as a result of the uncertainty surrounding how the current health crisis might impact their ability to start or complete important clinical trials.

While a number of companies are working on antiviral and vaccine candidates for Covid-19, a vaccine may not be available in the US this year. In addition, the economic benefits from any such therapies remain unclear, particularly given the uncertainty of both the duration of the pandemic and a potential vaccine's allowable payment terms.

One approach will be to look at companies that, along with their potential to contribute solutions to the fight against Covid-19, have wider portfolios of attractive therapies and assets.

When the dust settles, many countries will be investing and building up more buffers and resilience in their healthcare systems, to prepare them for possible future pandemics. This could include a rethink in the proximity and flexibility of supply chains and production to be closer to the end-consumer.

Healthcare fundamentals

Notwithstanding challenges like these, the long-term fundamentals supporting the sector remain intact.

First, the world's population is ageing, especially in many developed countries. This is likely to drive demand for healthcare, and boost revenues for the entire industry.

Furthermore, in many developing economies, including China and other parts of Asia, rising wealth and a willingness to spend more on healthcare and quality of life will continue to be a positive for the industry.

Of course, the competitive landscape will also evolve, and not all companies may benefit equally from this - or even benefit at all, for that matter. But at least the overall revenue pie for the industry is likely to grow.

What is more, there is tremendous progress being made in certain segments of the healthcare industry in areas such as the development of medical devices using advanced technology, as well as fields like gene-editing, gene-therapy and precision medicine.

These are all structural developments which we believe are here to stay, and represent potential opportunities for companies and investors.

Investment themes

Clearly, the Covid-19 outbreak removed the behavioural barriers to widespread adoption of telemedicine, ensuring that telemedicine solutions are here to stay.

Genetic therapies could significantly enhance healthcare in a post Covid-19 world. Unlike traditional drugs, genetic therapies aim to cure diseases by modifying or removing faulty human genetic information, actually removing the cause of illness. This represents a paradigm shift in medical care treatments.

How should we invest in the healthcare sector?

Healthcare investing is complex and there is a need to understand the evolving investment themes.

One recommended approach is through active management which offers the benefits of diversification in tandem with skilled stock selection. A typical healthcare fund management team would comprise a large number of specialists who have considerable experience in the entire spectrum of healthcare: biopharma, healthcare services and medical technology. This would give investors an edge to better capitalise on the complex nature of the sector.

Investors can also consider healthcare exchange traded funds (ETFs). ETFs replicate the holdings of healthcare indexes, but are not actively managed. The liquidity of ETFs gives investors the ability to express short term views very quickly, as investors are able to jump into or out of positions frequently. Short-term traders, are able to very quickly make a play on the price swings in the sector with low transaction fees.

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Healthcare sector investing is on the cusp of change - Business Times

Recommendation and review posted by G. Smith