Cookie Policy

We use cookies on our website and have placed these on your computer. By continuing to use our website you consent to this. For more information, including how to change your cookie settings and to disable our non-essential Google Analytics cookies, please refer to our Cookie Policy. If you do not wish to be reminded of this on each visit, please use the close button.

Large caps driving changes in healthcare

March 2019


Tags: Investing Strategies

As well as disruption and innovation coming from smaller, more nimble companies we are now seeing the proactive, larger businesses driving structural change across the healthcare sector.

Since early 2017, small and mid-cap healthcare companies have significantly outperformed large caps, a trend that started to reverse in 2H18. While we do not dispute the level of innovation we see in small companies – we see them as key disrupters of the industry – we think some of the valuations are beginning to get stretched.

However, valuations of large healthcare companies continue to look attractive on both a relative and an absolute basis; the healthcare sector’s price-to-earnings ratio is broadly in line with the market on a relative basis and is sitting on its long-term absolute average. We believe healthcare deserves a premium rating.

As an investment, these large companies generally offer the potential of steady earnings growth, strong cash generation and, ultimately, compounding returns for investors.

As an investment, these large companies generally offer the potential of steady earnings growth, strong cash generation and, ultimately, compounding returns for investors.

Given the uncertainties going into 2019 – Brexit, trade wars, rising interest rates, geopolitical uncertainty etc – we think there is a strong case to be made for large healthcare stocks given they offer investors defensive growth. Our focus is on large companies adopting proactive business strategies to embrace and drive change in the way healthcare is being managed, delivered and paid for.

Structural change in any industry can create winners and losers and we think the healthcare sector will be no different. In 2017, we articulated a two-pronged strategy for investing in healthcare: (a) focus on the large-cap consolidators adjusting to change, and (b) identify the small/mid-cap innovators that are disrupting the industry.

The past year has seen significant change at some of the larger companies that has begun to blur these two trends; healthcare management teams are becoming more proactive, developing innovative business strategies, disrupting healthcare value chains and building new competitive barriers to entry.

We believe we are entering a new phase of structural disruption that is not just about a new therapy – drug or device – or developing a new technology to address a problem (such as GP visits). All of these are still important, and can be good investments at the right price, but the next phase of disruption requires a realignment of interests across the value chain and relies on collaboration.

Not all large companies are willing or capable of such change – certainly some will get left behind in this fluctuating environment; many companies still have a more reactive approach, often reeling from new regulations or procedures forced upon them either by a regulator or by a payer.Dealing with this type of complexity is more the preserve of large companies; all stakeholders need to be engaged which means nudging patients, persuading doctors, corralling politicians and influencing payers. Some healthcare management teams are adopting a deliberate strategy to become agents of change; this may be driven partly by their vested interest, but we think it also reflects a recognition that healthcare disruption is inevitable.

Not all proactive strategies will succeed and creating an alignment of a diverse set of stakeholders is never an easy feat, even for an industry leader; nevertheless, we see themes emerging that are a useful guide to which companies may be successful.

We are seeing management teams of large-cap companies getting ahead of healthcare affordability challenges, the most obvious being drug pricing in the US. There are some pragmatic approaches to pricing that are a significant diversion from what has been standard industry practice; the migraine market in the US is an example of how quickly the pricing landscape is changing.

The next phase of disruption requires a realignment of interests across the value chain and relies on collaboration.

Amgen and Novartis launched their novel migraine drug, Aimovig, in May 2018 with a list price of $6,900pa - a significant discount to the $8,500pa recommended by the Institute for Clinical and Economic Review based on its independent pharmacoeconomic analysis.

In response, Eli Lilly launched its competitor drug, Emgality, in September at a similar price point; moreover, both drugs are available to new patients on a patient access programme that initially provides drugs for free.

With new competitors set to launch, we think the companies are trying to exploit their first-mover advantage and mitigate pushback on reimbursement from insurers.

Another new dynamic is related to the change in priorities when it comes to negotiating a product label with the regulators. One of the strict regulations for drug companies is that they can only promote medical data and indications that are contained on the product label. Historically, the industry’s approach has been to apply for as broad a label as possible with a view to using sales and marketing muscle to drive adoption by the prescribing community.

We now see companies looking for narrow labels that target very specific populations where a drug candidate can show strong efficacy. This improves product differentiation, demonstrates value when it comes to reimbursement discussions, and should drive high levels of adoption within the defined patient populations.

Novartis’ BAF312 for secondary progressive multiple sclerosis and AstraZeneca’s Imfinzi for early-stage lung cancer (so-called stage III) are two good examples of this strategy. The filing for BAF312 has only recently been accepted by FDA, so the commercial success has yet to be assessed, but Imfinzi’s rapid uptake underpins the value of this targeted strategy.

The challenge and opportunity for us is to find companies and management teams that have differentiated assets and who are adapting to a rapidly changing healthcare landscape. Not all large companies will be able to drive such change, some will get left behind, but we are already seeing large companies adopt a proactive strategy to be the agents of change. These are the ones making investment decisions today that will help shape the future of healthcare tomorrow.

 

Writers - Daniel Mahony, Gareth Powell and James Douglas, Fund Managers at Polar Capital Healthcare Trust

 

Read Focus on Funds Magazine 

 

Focus on Funds

This article was featured in the first edition of Focus on Funds magazine.

The views and opinions expressed by the author, Focus on Funds magazine or associated third parties may not necessarily represent views expressed or reflected by Selftrade.

The content in Focus on Funds magazine is non-partisan and we receive no commissions or incentives from anything featured in the magazine.

The value of investments can fall as well as rise and any income from them is not guaranteed and you may get back less than you invested. Past performance is not a guide to future performance.

Focus on Funds Magazine delivers education and information, it does not offer advice. Copyright© DIY Investor (2016) Ltd, Registered in England and Wales. No. 9978366 Registered office: Mill Barn, Mill Lane, Chiddingstone, Kent TN8 7AA.

 

Polar Capital Disclaimer

All opinions and estimates in this report constitute the best judgement of Polar Capital as of the date hereof, but are subject to change without notice, and do not necessarily represent the views of Polar Capital.  Polar Capital is not rendering legal or accounting advice through this material; viewers should contact their legal and accounting professionals for such information. This document does not constitute a prospectus, offer, invitation or solicitation to buy or sell securities and is not intended to provide the sole basis for any evaluation of the securities or any other instruments, which may be discussed in it. This is not a financial promotion.  Past performance is not indicative of future results.  A list of all recommendations made within the immediately preceding 12 months is available upon request.  This document is not a personal recommendation and you should consider whether you can rely upon any opinion or statement contained in this document without seeking further advice tailored for your own circumstances. This presentation is only made available to professional clients and eligible counterparties.  Shares in the fund should only be purchased by professional investors.  The law restricts distribution of this presentation in certain jurisdictions; therefore, persons into whose possession this presentation comes should inform themselves about and observe, all applicable laws and regulations of any relevant jurisdiction.

Writer: Focus on Funds Tags: Investing Strategies

Focus on Funds, brought to you by DIY Investor Magazine, is a publication dedicated to active investment management – unit trusts, OEICs and investment trusts.

You can start investing today through any of our account options:

Dealing Account

Access a wide range of global investments in this flexible, unrestricted account.

Find out more

Stocks and Shares ISA

Take advantage of tax free investing with our Stocks and Shares ISA today.

Self-Invested Personal Pension (SIPP)

From great value to best-in-class, access the SIPP to suit your needs through our extensive network of providers.

I've still got questions!

Our experts are on hand to help at our UK based Customer Experience Centre on 0345 0700 720

Selftrade does not provide investment advice. This article is the authors view and is not the view or opinion of Selftrade and Selftrade accepts no liability for any loss caused as a result of the use of this information. The opinions expressed are those of the author at the time of writing and should not be interpreted as investment advice.

The value of investments can fall as well as rise and any income from them is not guaranteed and you may get back less than you invested. Past performance is not a guide to future performance. We do not provide advice or make recommendations about investments. If you have any doubts about the suitability of an investment, you should seek advice from a suitably qualified professional adviser.

If you have a Stocks and Shares ISA, make sure you get the best value for your investments. We are ranked top for price on large portfolios (Platforum, 2018).

Open an account today and we’ll cover any transfer fees up to £100.*

*T&Cs apply.

Open a Stocks & Shares ISA

Find out more