It has been a volatile ride for the global healthcare sector over the medium term with some managers...
It has been a volatile ride for the global healthcare sector over the medium term with some managers seeking opportunities in biotechnology and smaller pharmaceuticals.
Antony Milford, manager of the £465m Framlington Health Fund, unlike many managers of big health care funds, has maintained very low exposure to large pharmaceutical stocks instead preferring biotechnology and mid to small cap stocks in the sector.
That position has been held against a back-drop in which large pharmaceuticals have underperformed small caps and biotechnology companies. From January 29 1999 to 31 December 2001, the S&P Health Care Index (comprising most big US pharmaceuticals) was up just 4.7%. However over the same period, the Russell 2000 Health Care Index was up 61.57% and the Amex Biotech index had risen 195%.
Milford, whose healthcare fund is up 121.1% over the three years to 20 February ranking it second in the specialist sector, has seen performance suffer due to a lack of confidence in the biotechnology sector in which he is overweighted.
He says: 'There is a fundamental reason why we are underweight large pharmaceuticals. It is still a very good industry, but it is in a period of slowing growth. In addition, a large number of significant drugs are going off patent. The biggest example of this was Prozac which came off patent last year and 80% of sales were lost to generic providers within the first three months.
'Other products due to come off patent shortly include Claritin which is for allergies and ulcer drug Trilosec, one of the world's largest selling drugs.'
Milford says the pharmaceuticals are not generating sufficient new drugs to maintain the loss from drugs going off patent. He says: 'Politically they are very unpopular and there are moves in Washington to accelerate the process in which generic drugs can come onto the market. Furthermore the regulatory body, the FDA has been more cautious in approving new drugs.'
Milford's largest holding is Medimmune, a US biotech company which makes a vaccine used for babies suffering respiratory illness. Unlike Milford, Kristine Bryan, fund manager of the Schroder Medical Discovery Fund has a closer to market weighting in pharmaceuticals.
She points to some broader aspects influencing the global healthcare sector. On the current political climate in the US with relation to healthcare, Bryan says her fund will continue to look for areas where people would get the most cost efficient medicine and that can include very highly profitable pharmaceutical companies.
She says, even if changes in the laws are made, the sector will still do well. Bryan argues there are long-term benefits investing in the global healthcare sector which, she reports, has a market capitalisation of over $2 trillion. 'This is larger than the entire German market, the entire French market, the entire Japanese market and it's almost commensurate in size with the FTSE All-Share,' Bryan says. 'This sector also carries advantages of having high barriers to entry within the pharmaceutical sector as it takes over $500m to bring a single product to market.'
Among the stocks she favours is US company Baxter International. Bryan says: 'Baxter International was perceived as a company that just made IV fluids and IV bags and products for renal dialysis, but they have moved rapidly and successfully.'
Demographics continue to favour healthcare.
Biotech firms compete for drugs discovery.
Opportunities in mid and small cap firms.
Many drugs coming off patent.
Few drugs in pipeline for big firms.
Political threat to pharmaceuticals.
The forces at play in investment - most obviously, regulatory change, uncertain markets and shifting demographics - are as strong today as they were when Professional Adviser launched its sister magazine Multi-Asset Review in 2017.
Regulator has visited some firms already
Platforms react to Fidelity blocking Income Focus purchases
Chris Hill's letter to Treasury
Cash balance surges