Almost half of venture capital groups looking to invest in the UK believe healthcare companies will provide some of the most fertile investment ground over the next two years, according to a recent study
Although August saw a modest rally in the markets, September led to a renewed bout of selling, causing the FTSE 100 Index to retest and fall slightly below its previous low at the end of the third-quarter. This was followed by further declines in early October.
The evidence of recovery in the UK or US remains mixed and the possibility of a double-dip recession is still a distinct one.
Although some sectors are traditionally seen as defensive and expected to perform reasonably well in a bear market, we are seeing another interesting trend emerging ' the down-rating of whole sectors, even if they are normally considered defensive.
So which industry sectors should investors be looking to in order to reap the benefits of strong returns while maintaining a degree of protection from the bearish investment climate?
Similarly to dot.coms, although perhaps not quite as spectacularly, the biotech sector has seen its bubble burst this year as the value of drug development companies has plummeted.
The pharmaceutical sector is traditionally considered defensive, with classic features such as stable, growing markets, high margins, high barriers to entry, non-cyclical demand and products that are a necessity to the end-users. However, investors are focusing on concerns over expiring patents, governments overriding patents, competition from generic manufacturers and gaps in the development pipeline. These have come together to undermine investor confidence in the healthcare sector.
However, investors should not yet take their eyes off the sector's lifeblood monitor as it could still offer investment opportunities, with good growth and stability. Indeed, a recent study by BDO Stoy Hayward found almost half of venture capital groups looking at investing in the UK believe healthcare companies will provide some of the most fertile investment ground over the next two years.
Why invest in healthcare? Well, the sector undoubtedly has the potential to offer investors a higher degree of stability than others. An ageing population, coupled with longer life expectancies, almost guarantees a healthcare boom over the medium term.
This growing demand, backed by increasing NHS expenditure in the short term and the possibility of changing legislation, will also help fuel the healthcare market.
However, there seems to be one area of healthcare that is largely overlooked by investors. This area spans a diverse range of companies, from those that specialise in selling medical products, devices or components to those that offer services, such as health recruitment consultants. These tend to be small, niche companies, which perhaps goes some way towards explaining the marked investor scepticism, or oversight, in this area.
It cannot be disputed that biotech stocks do, in a limited sense, represent a risky stock option. Biotech shares can be highly volatile. Only a small proportion of the compounds started in clinical trials ever make it to doctors' prescription notepads. Even a large number of those entering stage three fail at the final hurdle.
And the headache does not end there. Once approval is gained, success isn't guaranteed. The profitability of approved drugs also depends on strong patent protection and marketing spend. This in itself may reawaken investors' memories of dot.coms burning their way through millions of pounds every month. If this is indeed the case, it could mean companies will find it difficult to find financial backing, or the process to do so will be very prolonged.
But for those that do take the risk, there can be substantial rewards. Once a healthcare company strikes gold and a drug passes the third stage of trials or a piece of equipment comes to market, the appreciation of share value is likely to be much greater and faster.
The overall sense of doom and gloom surrounding the equity market in general, together with the lack of confidence and knowledge of areas within this sector, means many companies fall way short of their actual value. So it seems likely when the market does rebound, these companies will see a sharp rise in share price. For the investor with foresight and patience, now is an excellent time to buy.
For the more risk-averse investor, who nevertheless wishes to jump on the healthcare bandwagon, one point to bear in mind is that while the biotech sector is drug discovery driven, medical equipment suppliers are product driven. So although returns for these companies are unlikely to be as high as for a successful biotech company, they can offer favourable returns with less risk.
Ferraris, the international medical and life sciences products and components group, is a good example. Operating in the EU and North America, the company serves both the cardio respiratory and asthma management markets. It has recently achieved FDA 510k approval for the marketing and sale of its new, high-speed diagnostic instrument to measure respiratory, metabolic and cardiac parameters when patients are subject to exercise and stress. The main application for this device is envisaged to be in the professional sporting arena, which tends to attract a lot of high-profile investment.
Ferraris has also recently developed metabolic and cardiac monitoring equipment for babies. Since paediatrics tends to be an area that historically has a good investment record, there is likely to be strong demand for the product, especially as soon as doctors start seeing its benefits. Medisys, on the other hand, stands to benefit from new legislation. The company's syringes have been fitted with an automatic needle retraction system so the used needle is safely stored in the barrel after use and prior to disposal.
Companies offering products such as this were boosted when, on 6 November 2000, Bill Clinton signed The Needlestick Safety and Prevention Act, which required safe syringe use implementation by 18 April, 2001. This new piece of legislation is to help protect the nation's healthcare workers by requiring the use of safer medical devices that reduce or eliminate accidental needlesticks.
The new law requires hospitals and healthcare facilities to use safer medical devices to reduce the risk of needlestick injury (there are an estimated 800,000 needlestick injuries in the US each year), hence growing NMT's target market. It is only a matter of time before a similar Bill is passed in the UK and Europe.
Companies such as Goldshield are also worth monitoring. Goldshield's healthcare arm has grown dramatically and organically, something the company's directors put down to the time and cost involved in bringing new, internally developed healthcare products to the market being significantly lower than those for pharmaceutical products.
Currently, the product portfolio covers six of the major healthcare categories: vitamins, minerals and supplements, analgesics, skincare, herbal medicines, cough and cold remedies and slimming aids.
At present, the products are principally sold via mail order, although it is the company's intention to increase the use of multiple channels of distribution. The directors' objective is to continue to expand the portfolio of healthcare products, both in market sectors in which the group is already prominent and those where it does not yet have an established market presence, suggesting there may be good returns to be had.
Obviously, no investment is without risk and each investor must choose which type of investment strategy is suitable for their portfolio, personal risk appetite and overall investment aim. At present, equities offer a greater long-term growth and recovery opportunity that must be seriously considered against the stability of defensive shares.
The healthcare sector can offer get-rich-quick-type pickings but, equally, investors can suffer from steep reductions in stock prices. No matter how promising they seem, potential drugs, equipment and medical products must first clear all stringent laboratory test hurdles and human clinical trials. These, and their associated regulatory procedures, continue to be time-consuming, so are not ideal for investors who are very risk adverse.
However, even in the current market, there could be real opportunities for those prepared to watch and wait.
The pharmaceutical sector is traditionally defensive, with high margins, high barriers to entry and non-cyclical demand.
Once a drug passes the third stage of trials or a piece of equipment comes to market, the appreciation of share value is likely to be faster.
While the biotech sector is drug discovery driven, medical equipment suppliers are product driven.
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