1 September 2020
Healthcare has become the predominant issue of 2020, resulting in a great deal of interest in the sector. However, investors should understand the different types of companies, approaches, and risk profiles before deciding whether to participate, according to wealth manager RBC Brewin Dolphin.
Despite the market sell-off of during March and April, the healthcare sector has remained broadly resilient. The Biotechnology and Healthcare Investment Trust Index returned +18% in the first six months of 2020, while individual trusts have performed even better.
However, over the long term there have been large disparities in performance within the sector, with some investments registering exceptional gains, while others have been more modest.
John Moore, senior investment manager at RBC Brewin Dolphin, said: “Tech has, for the most part, stolen the investment limelight during the Covid-19 crisis, but there has also been a surge in interest in healthcare, which is understandable given we’re in a pandemic. There is undoubtedly a recognition that we are all going to be more focused on, and mindful of, healthcare outcomes in the future; however, from an investment point of view it is a good idea to scratch beneath the surface to understand the very different constituents within this broad group.
“Most people will have heard of the big pharmaceuticals – or healthcare – companies such as GlaxoSmithKline and AstraZeneca, stalwarts of the UK market. But many of the businesses generating a lot of excitement at the moment are, by comparison, more obscure names in the biotechnology industry, and there are important differences between these two groupings in terms of depth of portfolio and financing. Our advice is to always ensure you have a diverse range of investments to manage and mitigate against risk.”
Different approaches and risk profiles
While big pharmaceuticals companies such as Novartis, Roche, or Pfizer are each worth between $100 billion and $300 billion, with one or two exceptions, biotech firms tend to be much smaller. They are also often focused on a specific product or area of scientific research, rather than managing and developing a portfolio of treatments at the same time, which can make them a potentially more rewarding, but riskier, proposition.
John Moore said: “If you go back 15 to 20 years, pharma companies had ‘blockbuster’ drugs that were distributed through sales channels en masse and at scale, aimed at millions of people with the same illness or symptoms. To this day, these businesses are all about scale, the strength of their balance sheet and global distribution.
“Within healthcare this is a lower risk approach. If, for example, their Covid-19 test is unsuccessful, the business has a whole host of other products in development and that contributes to relative share price stability. If they spend hundreds of millions of dollars on a particular drug that doesn’t work out, the market knows big pharma companies have the financial muscle to absorb that cost.
“Since the turn of the millennium, advances in areas such as gene mapping and sequencing has allowed for the development of more specialist and personalised treatments. With that comes higher costs and greater risk – given this research and financial commitment, biotech companies tend to take more of an all or nothing approach based on a single product. As an investor in biotech, you have to be more prepared for binary outcomes: in the vast majority of cases there is an enormous upside or downside, with little in the middle.”
Regulatory and government stimulus
Part of the interest in healthcare and biotech has been driven by government and regulatory initiatives, such as Operation Warp Speed in the USA, to accelerate the development, manufacturing, and distribution of Covid-19 treatments.
John Moore said: “The Covid-19 pandemic has led to the acceleration of many trends, and among them is the trial and approval of new healthcare tests and treatments. There has been a shift in attitude from governments and regulators and they seem to be more willing to explore what is out there in the hunt for a vaccine and associated treatments.
“In the UK, the likes of Omega Diagnostics have seen their share prices rise dramatically over the last few months, in the case of Omega, with anticipation over its Covid-19 testing kit. If it works, then it could be transformative for the business and, if it doesn’t, then it is back to square one. As we draw towards a potential vaccine, we’re about to watch something similar play out for a number of biotech companies and investors’ decision to participate very much depends on their appetite for risk.”
Example funds:
Biotech Growth Trust – Biotech Growth Trust, managed by Orbimed, is an investment trust that invests in biotechnology companies across the world – more than 80% of its exposure is to US businesses, with additional interests in China, the UK, and Canada, among others. Its holdings include Vertex Pharmaceuticals, the drug developer; Biogen, which develops treatments for neurological diseases; and Nasdaq-listed Gilead Sciences.
John Moore said: “The Biotech Growth Trust took the decision to place more emphasis on smaller, more innovation-driven, biotech companies. Whilst this offers significant discovery and capital appreciation potential, it can come with those binary risks too. The trust has performed very well over the last couple of years and whilst growth potential remains investors should also expect bumps along the way.”
Syncona – Syncona is a FTSE 250-listed investment trust that founds, funds, and grows biotech firms. Among its portfolio of seven businesses are Gyrascope Therapeutics, an ophthalmology specialist; cell therapy company, Autolus; and Anaveon, a pre-clincal phase start-up focussed on biologics. John Moore said: “Syncona’s stable of businesses is a great example of biotechs that will either be brilliantly successful or fail. That fact is captured in the volatility of some of its holdings – Nasdaq-listed Autolus, for example, in two years has seen its share price fall from $48 to around $4.50, and now sits at around $16. However, Syncona aims to de-risk the company development process by having lots of medically qualified people around the due diligence table. It is reasonable to expect bumps along the way, but Syncona could be a future contender for a FTSE 100 position if some of its investments start to pay off.”
Worldwide Healthcare Trust – Worldwide Healthcare Trust is run by OrbiMed Healthcare Fund Management and invests in a mixture of pharmaceuticals and biotechnology companies, aiming for a high level of capital growth. Its largest holdings include Takeda Pharmaceutical, Merck, Novartis, and Pfizer, with well over half the fund exposed to North America. John Moore said: “Worldwide Healthcare Trust is a blend between the two approaches, with the associated benefits of the different levels of volatility and risk. It is one of the best performing funds over the last five or so years and has an exceptional long-term record, with a mixture of high-growth biotech companies and a base of established healthcare names.”
Polar Capital Healthcare – Like many of the other trusts, Polar Capital Healthcare has a large bias towards US equities. It also has exposure to The Netherlands, Japan, and Denmark. Among its largest holdings are United Health Group, Horizon Therapeutics, and Bristol-Myers Squibb. John Moore said: “Polar Capital healthcare takes a steadier, mostly pharmaceuticals-based approach, but it will also look at wider aspects such as healthcare insurance and delivery. Whilst performance has been below that of peers recently, much of that reflects the broader spread, conservative approach which may be more helpful going forward.”
PRESS INFORMATION
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NOTES TO EDITORS
Disclaimers:
- The value of investments and any income from them can fall and you may get back less than you invested
- The opinions expressed in this document are not necessarily the views held throughout RBC Brewin Dolphin Ltd.
- Past performance is not a guide to future performance
- We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. In addition we reserve the right to act as principal or agent with regard to the sale or purchase of any security mentioned in this document. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.brewin.co.uk.
- This information is for illustrative purposes only and is not intended as investment advice.
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*as at 30th June 2020