Investing through a winter of discontent
The term “Winter of Discontent” was used in the opening line of Shakespeare’s...
Even before the Coronavirus pandemic, we knew that healthcare budgets in many countries were stretched, and the pressure to develop new medicines, new health products and more efficient tools and practices was building – thanks to the demands of an ageing and increasingly health-conscious world population.
The past few weeks have magnified this problem and today, as governments around the world try to control the spread of the disease so that it doesn’t overwhelm our healthcare systems, all eyes are on the industry and its workers. We are clapping our NHS workers and following closely the developments of biotech companies and scientists, as they work 24/7 trying to find medicines, tests and, ultimately, a vaccine that can protect us from the virus.
Earlier this week, James Douglas, co-manager of Polar Capital Global Healthcare Trust, told us how the healthcare sector is responding to the coronavirus crisis. From short-term needs such as tests, ventilators and vaccines, through to longer term investment in our global healthcare infrastructure and the way we access services, the implications are significant.
According to Mark Kelly, a healthcare analyst at Brown Advisory, one area that has been hurt by the crisis is demand for non-elective surgeries.
“‘Elective’ is surgery that is scheduled in advance because it is not an emergency or life threatening,” he said. “What we’re seeing is ‘non-elective’ surgery turning out to be ‘elective’ (and pushed back) – unfortunately even cancer patients and those requiring brain surgery or spinal procedures are being prioritised below coronavirus patients.
“Therefore, we have concern for providers of hospital systems (for those procedures that are being pushed back). Their margins are low even in the good times. They will face severe financial difficulties given the reduction in demand. Today, we favour pharmaceuticals, managed care and companies that serve the biotechnology industry.
His colleague, Bertie Thomson, who is co-manager of Brown Advisory Global Leaders fund, added: “We like healthcare, and we really like some of the business models in medical tools and devices etc, such as Edwards Lifesciences (a Global Leaders investment since day one).
“Nonetheless we have been underweight healthcare for a couple of years – primarily due to valuation – the companies were simply too expensive for us, so we invested elsewhere.
“The only new investment we made in 2019 was in Roche Pharma, a global healthcare company headquartered in Switzerland. Roche has been one of our best performers in 2020, in part due to the defensiveness perceived in the healthcare sector.
“Edwards Lifesciences is a developer and manufacturer of technologies used to treat structural heart disease. It is clearly exposed to the delays we are seeing in elective surgery and we will no doubt see sales stall in the first half of 2020. But at the moment this is a short-term demand issue, and not a competitor stealing customers. Cashflows in 3-4 years do not appear to have materially changed at the moment, despite near-term disruption.”
The importance of the health care sector to both society and the global economy is undeniable. Global health care spending is likely to exceed $10 trillion per year by 2022, according to Deloitte’s 2019 Global Health Care Outlook. And, unsurprisingly, health care has also grown to become the second-largest sector in public equity markets.
Intractable challenges and obstacles remain – before the coronavirus, the sector had issues around rising costs, rapid changes to the models used to deliver care, impacts from climate change and pollution, and massive inequities in access to care.
But when the worst of the crisis has passed, we believe the quest to deliver the holy grail of better healthcare for less money, will continue. And the investment opportunities will be plentiful.
So, as we begin a new tax year and have new ISA and pension allowances to think about, maybe consider investing in global healthcare…
*Source: Fund factsheet, 29 February 2020