Exciting opportunities for
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 treats metastatic melanoma. We expect this drug to reach block buster status in melanoma alone, with the potential 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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