Is SA’s health­care sec­tor a healthy in­vest­ment choice?


Finweek English Edition - - COVER -

With the global pop­u­la­tion get­ting o l d e r a n d mor e peo­ple mov­ing into the mid­dle class, in­creas­ing the de­mand for health­care prod­ucts and ser­vices, in­vestors can’t go wrong in­vest­ing in the sec­tor – or can they?

Health­care i s now t he world ’s largest in­dus­try, with a value and cost three times greater than the bank­ing s ec­tor, ac­cord­ing t o McKin­sey. Those t r um­pet­ing t he mer­its of in­vest­ment ex­po­sure to health­care and phar­ma­ceu­ti­cal com­pa­nies ar­gue that health spend­ing will al­ways be a pri­or­ity, and de­mo­graphic trends – in­clud­ing age­ing pop­u­la­tions and the rise of chronic ill­nesses and dis­eases of pros­per­ity – will sim­ply in­crease this de­mand.

The scep­tics ar­gue that the sec­tor is highly reg­u­lated glob­ally and new rules, such as new patent pro­cesses for the reg­is­tra­tion of drugs, or changes in gov­ern­ment spend­ing can have a sig­nif icant im­pact on rev­enue in a rel­a­tively short space of time. The pres­sure will al­ways be on to pro­vide the best pos­si­ble health­care prod­ucts and ser­vices to the max­i­mum num­ber of peo­ple at the low­est cost pos­si­ble.

In ad­di­tion to the reg­u­la­tory risk, stocks in the lo­cal sec­tor are look­ing ex­pen­sive, with stal­warts such as Aspen Phar­ma­care trad­ing at a price-toearn­ings (P/E) ra­tio of 31, Medi­clinic at 27, Net­care at 25 and Life Health­care at 21.8. Mar­ket bulls ar­gue that th­ese com­pa­nies are known for strong cash f low gen­er­a­tion and high div­i­dend yields, jus­ti­fy­ing the pre­mium.

“I think at some point th­ese stocks be­come ex­pen­sive,” says Reuben Beelders, port­fo­lio manager at Gryphon As­set Man­age­ment, who cau­tions on the reg­u­la­tory risk fac­ing the sec­tor. “If the in­dus­try is al­ways go­ing to be sub­ject to reg­u­la­tion, should it com­mand such a pre­mium?”

For big phar­ma­ceu­ti­cal com­pa­nies, a ma­jor chal­lenge is to get new drugs de­vel­oped and ap­proved, par­tic­u­larly when they have big-sell­ing brands com­ing off patent or when ri­vals l aunch suc­cessf ul new prod­ucts. Glax­oSmithK­line is cur­rently tak­ing a lot of f lak from in­vestors and an­a­lysts for its fail­ure to build its drug pipe­line to re­duce its re­liance on its de­clin­ing best­seller Ad­vair asthma medicine.

Other fac­tors are also shap­ing the sec­tor, mak­ing the en­vi­ron­ment more chal­leng­ing for es­tab­lished health­care providers. In a re­cent re­port, PwC iden­ti­fied three ma­jor forces driv­ing change in the mar­ket: Gov­ern­ments are ex­plor­ing new ways to con­trol costs and change prac­ti­tioner be­hav­iour as they face an i ncreased health­care bur­den, driven by the de­mo­graphic changes high­lighted above. The fo­cus will shift to out­comes, qual­ity and cost sav­ings, and there will be an in­crease in the num­ber and scope of public/pri­vate part­ner­ships as the pri­vate sec­tor will be roped in to help gov­ern­ments pro­vide sus­tain­able health­care for their cit­i­zens, PwC said. The de­pen­dence on large, ex­pen­sive fa­cil­i­ties will lessen, with a more pa­tient-cen­tric health sys­tem emerg­ing. This will open the door for in­creased com­pe­ti­tion from in­dus­tries such as re­tail, telecom­mu­ni­ca­tions, health, well­ness and s pa, and travel and tourism, PwC said. The in­dus­try is al­ready see­ing dis­rup­tive in­no­va­tions, such as smart­phone apps that help pa­tients connect to pay­ers and providers in real-time. An­other in­no­va­tive dis­rup­tor is Ther­a­nos, based in Palo Alto, Cal­i­for­nia, which de­vel­oped a new, quicker way to test blood at a frac­tion of the cost charged by com­mer­cial labs. Progress in ge­netic map­ping and a dvance­ments i n s ci ence a nd tech­nol­ogy will make health­care more per­sonal , pre­dic­tive and pre­ven­tive.

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