Is SA’s healthcare sector a healthy investment choice?
BY JANA MARAIS
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.