With healthcare investment currently the Government's top priority, as seen in the recent Budget, the growth the sector has seen over the past 20 years looks set to continue
Few market observers would dissent from the opinion that the health sector has had a good run over the past two decades. However, the strong prospects for future growth in the sector mean investors should consider placing at least a portion of their assets in funds specialising in this area.
This belief is based on the ever-increasing focus on health concerns across the world and the resulting pressure on governments to ensure people get the treatment they want. Add in the potential of pioneering medical research and development in the private and public sectors and the argument for health investment becomes convincing.
Health investment is the UK Government's prime concern, as was shown in the recent budget and the UK is not unique. Increased living standards over the past 100 years means the priority of the populations of developed and developing economies has moved from basic provision of food and shelter to enhancement of life and life expectation. The provision of healthcare is seen as the prime element of this.
This shift has meant an increasing proportion of gross domestic product (GDP) being used to meet this need. As can be seen from the table, the past three decades have seen an inexorable rise in the proportion of GDP taken up by healthcare expenditure in most advanced countries.
We have already witnessed the growth of both private and public health as an industry on a worldwide basis and the associated development of pharmaceutical, biotechnology and other healthcare associated businesses. However, as the UK Government has found, an established health service generates increasing expectations among the population in terms of the range of conditions that can be treated or alleviated. Furthermore, that expectation will shift as the demographic impact of increased ageing is felt. The number of people aged more than 60 around the world is expected to increase from 629 million today to almost two billion by 2050.
The fact more people are living longer means conditions and ailments that were previously unacknowledged begin to surface, with pre-senile dementia (Alzheimer's disease) a prime example of a new area of concern and expense in developed countries.
Simultaneously, other elements of demographic shift mean there is an increasing demand for caring services. An example here is the way that in developed economies, children will tend to leave home earlier and move away from parents, implying greater dependency on the provision of caring services provided by care homes and nurseries.
The other factor is development of technical expertise ' for instance, in transplant technology ' as well as developing treatments for conditions that were previously considered untreatable. Significant advances have been made in the treatment of cancer and heart disease, so what used to be a fatal diagnosis can now be looked upon as treatable.
Cancer researchers believe they are close to unlocking the complete genetic makeup of many common cancers. By understanding exactly how the rogue cells differ from normal cells, treatments can be modified so they work on just the cancer cells.
In the past, heart transplants sometimes failed because the person's immune system rejected the transplanted heart. With the use of drugs to prevent rejection, heart transplants are now extremely successful.
The expectation of developed world populations is that such procedures should be available to them. Significant demand is also expected to arise from groups that, until recently, have not had the economic or political power to ensure they are addressed. For instance, it is known that people of Afro-Caribbean extraction can be prone to a condition known as sickle cell anaemia. It can confidently be expected that, as this group achieves a more rightful share of resources, an increased amount of research will be conducted into finding an effective remedy for the condition.
The advent of Viagra as a cure for erectile dysfunction led to much mirth but its use and the fact that, in some cases, it can be obtained on the NHS shows just how barriers are being broken down through social advances. Whereas in previous generations, men would be too embarrassed even to admit to such a condition, there is now an increased readiness to seek medical assistance.
But it is not all down to wonder drugs such as Viagra, as shown by American Medical Systems (AMMD), one of the top ten holdings in the Framlington Health fund. Based in Minnesota, USA, AMMD is the leading developer and manufacturer of therapeutic devices used in the treatment of erectile dysfunction (ED), both urinary and fecal incontinence in men and women, as well as prostate disease.
The company was spun off from Pfizer in September 1998 and is now the largest pure-play company in urology. AMMD focuses primarily on minimally invasive techniques in treating ED, incontinence and prostate disease, where its products range from slings to prostheses, as well as urethral stents. It develops devices for large underserved markets including approximately 11 million people in the US alone.
Further instances of greater individual attention to healthcare and associated matters are apparent in the growth of such areas as cosmetic surgery, obesity, smoking prevention and complimentary medicine.
A further spur to growth occurred when it became apparent that the idea that medical science had conquered the world of illness was an illusion. The advent of such conditions as AIDS in the 1980s and the detection of new viruses such as Ebola showed there is no reason for complacency.
So, the demand side of the equation is quite clear, but what of the supply side? Here, quite apart from governmental action to provide health services in response to increasing demand from populations, there is the growth in the health sector generated through research and development.
Such developments may arise from the laboratories of companies such as GlaxoSmithKline and the like. However, the increasing globalisation of concerns over the past decade has promoted new research that impacts greatly on healthcare. A major factor here is the research that led to the mapping of the human genome and the resultant gene therapies and other procedures developed as a result.
An example from our portfolio is Lexicon Genetics, a US-based genomics company. It uses processes to develop understanding of the functions of genes. Certain disease states produced can be analysed at the level of genotype and phenotype to produce unique targets for the generation of Lexicon's own drug discovery pipeline. The company has allowed customers to license this technology and has also formed collaborations with the aim of generating revenues in the short term.
Stock markets have responded with alacrity to the perceived potential for the healthcare sector. Naturally, many will focus on the biotech boom of recent times, as is shown in its significant outpacing of the overall world market.
However, as is the case with most frontier developments, there will be many more failures than successes. The rise and fall in market confidence will be marked by overall volatility in the sector.
Volatility of this sort has been a feature of the biotechnology sector since it became a recognisable investment area but it has not prevented biotechnology stocks from being an outstanding long-term investment. Volatility will reduce as more biotechnology companies reach profitability over the next decade, and the long-term returns from investing in the sector will be as outstanding as they have been over the last 10 years.
The downturn in the biotech sector during December 2001 and January 2002 represented a buying opportunity and there is currently a biotech weighting of 37% in our portfolio.
Investing in the health sector was once more a case of buying large pharmaceutical stocks such as Glaxo and holding, thereby reaping the benefits of profits growth based on patented developments.
However, that scenario has shifted since the 1980s and early 1990s when those patents were still in place. The large pharma companies are in some trouble as those patents expire, a recent example being that of Prozac, a patented product of Eli Lilly. The expiry of that patent led to a 90% decline in price.
The large pharma stocks are engaged in licensing new products from the biotech sector in order to give their sales forces something to sell. However, this sector is considerably more mature than ten years ago, which is reflected in the type of licensing deals they are negotiating ' taking a 40%-60% share of profits compared to a typical range of 9%-15% ten years ago.
This has led to a shift in the composition of the Framlington Healthcare portfolio, with a much greater concentration on biotech stocks. But no matter how much more mature this sub-sector becomes, we have chosen to limit the size of individual holdings while greatly increasing the number purchased in order to diversify away its implicit risk level.
Not having an element of specialist healthcare investment in a portfolio could be construed as risky. As can be seen, the demand for healthcare is a natural consequence of countries moving up from third to second and first world status. Add to that the increasingly sophisticated and diverse demands from established developed economies and you have a recipe for growth.
Healthcare investment is currently the UK Government's primary concern, as shown by the recent Budget.
The past three decades have seen an inexorable rise in the proportion of GDP taken up by healthcare expenditure in most advanced countries.
A demand for healthcare is a natural consequence of countries moving up from third to second to first world states.
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