HEALTHCARE SECTOR INVESTORS
Long-term arguments in favour of healthcare investing are well rehearsed:
ageing populations in the developed world; growth in emerging markets;
rising incomes and thus more disposable cash to spend on medicine; rapid
technological advancement and innovations in medicine.
Additionally, a case can and should be made
for investing in healthcare as an opportunity
for 2012, to tap into low valuations,
buoyant M&A activity and a wave of new drugs
in development that will soon be launched.
Valuations across the sector are extremely attractive
and are currently near or even below their lows from the
last recession. Roche is trading at 11.3x forward earnings
and Pfizer is at 9.3x. This compares with minimum price
to earnings multiples in Q4 2008 and Q1 2009 of 11.3x
and 11.0x, respectively. As the sector mean reverts and
valuations recover, investors will see strong returns.
There are signs this is starting to happen; December
2011 saw mid- and large-cap pharmaceuticals and
large-cap biotech perform well. Generalist investors have
been increasing their allocations to healthcare to take
advantage of attractive valuations and healthy dividends,
and to gain exposure to new drugs in the pipeline.
Healthcare is often perceived as a defensive investment
and it proved its defensive credentials last year. The
MSCI World Healthcare Index returned 10.27% for
2011 in sterling terms, whilst the MSCI World Index
lost 6.66%, according to FE Analytics. However,
healthcare offers both growth and value stories and
in many cases the potential for exponential gains.
Research and development (R&D) is undergoing a
renaissance; several potential blockbuster medicines
have recently launched or are about to be launched.
We expect the companies developing them to
experience dramatic revenue and earnings growth,
valuation expansion and strong share price
performance. In a welcome move, the US Food &
Drug Administration (FDA) picked up the pace
of its new approvals last year. In particular,
the FDA has become more constructive on
cardiovascular, diabetes and obesity drugs.
Among the large-cap players, Bristol-
Myers Squibb arguably possesses the best
product pipeline. Their most important
drug launch in 2011 was Yervoy, a
novel oncology drug that
expect this drug
to reach block
to reach megablockbuster
status if the drug works in other tumour types.
Other important pipeline opportunities
for Bristol-Myers Squibb include Nulojix,
a therapy for transplant rejection with
FDA approval; Eliquis, a drug for stroke
prevention, which should be approved
later this year; and dapagliflozin, a novel
treatment for diabetes. Additionally,
the company is in hot pursuit of
the next wave of therapies for the
treatment of hepatitis C, an effort
that was recently bolstered by the
acquisition of Inhibitex Inc. for $2.5
billion. Growth potential from this rich
pipeline of new drug candidates should
more than compensate for upcoming
patent expirations at Bristol-Myers Squibb.
Roche is another large company whose
product pipeline is undervalued by investors.
The company is the global leader in oncology
and possesses a pipeline of both novel and
next generation therapies for cancer. Zelboraf
represents a cutting edge therapy for melanoma
patients with a specific genetic mutation, which
was approved last year. Next generation drugs
for breast cancer will launch (pertuzumab)
or file (trastuzumab) this year. Roche also
possesses an interesting cardiovascular drug,
dalcetrapib, to treat heart disease by targeting
“good cholesterol”. An interim look at the
data will occur later this year, and if positive,
could be transformative for the company.
Other exciting new medicines include
Dendreon’s prostate cancer treatment
Provenge, Incyte Corporation’s drug Jakafi
(ruxolitinib) for myelofibrosis, Qnexa from
Vivus for obesity, and the recently launched
Eylea (aflibercept) from Regeneron.
One of the most groundbreaking recent events
in the sector was the launch by Life Technologies
of its Ion Proton Sequencer in January. This
device can map a person’s DNA in a day, at a
cost of $1,000 – making DNA-based treatments
accessible to a mass market for the first time. In
the near future, doctors will be able to prescribe
personal treatments for HIV, cancer, Parkinson’s
and other diseases that are specifically
tailored to each patient’s genetic make-up.
A more immediate opportunity for investors
to make profits is through M&A activity. The
last market downturn starting in mid-2008
led to a flurry of M&A activity as acquirers
took advantage of lower valuations, and
there are signs that last year’s downturn
could spur a new wave of acquisitions.
In a record-breaking deal illustrating the returns
that M&A and new drug developments can unlock,
Gilead Sciences acquired Pharmasset for $11
billion in November 2011. This price represented
a premium of about 85% to the previous close,
a record high in the industry for an acquisition
of a company with no revenues and a lead asset
in Phase III clinical development. Pharmasset’s
PSI-7977 has the potential to become the first
oral treatment for hepatitis C and Gilead hopes
it will obtain U.S. regulatory approval in 2014.
For 2012, valuations across the board remain
relatively low, innovation is flourishing and
M&A activity is likely to pick up. These factors,
coupled with the healthcare sector’s longer-term
trends, mean that there is a lot for investors
to look forward to this year and beyond.
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