Chasing a Covid cure could be an unhealthy move
VACCINES, R-rates and clinical trials – suddenly everyone is not only an armchair epidemiologist but a backseat pharmaceutical developer, too. In the midst of a pandemic, an obsession with all things medical is natural, but it is also fuelling an interest in healthcare investment that is starting to look dangerously like a bubble.
In April, The Mail on Sunday’s Wealth pages looked at the prospects of some of the firms working to combat the coronavirus. Since then, many of the listed companies have seen their share price rise sharply as we await breakthrough treatments that could get us out of our sorry state.
Huge investment gains are exciting. But as Gareth Blades, an analyst at healthcare investment specialist Amati warns, there is a danger in chasing Covid-19 cures at the expense of considering whether the companies that trumpet them have a strong underlying business model.
‘Covid-19 has made valuing healthcare companies more challenging,’ he says, pointing to sky-high valuations for firms with products that in some cases haven’t even passed the proof of concept stage. There is value to be had in a sector that is likely to see huge investment in coming years. But the coronavirus makes it harder to pick investment winners.
John Moore, senior investment manager at the wealth manager Brewin Dolphin, says investors need to take time to understand the different types of healthcare companies before deciding whether to participate in the healthcare ‘gold rush’.
He adds: ‘There is undoubtedly a recognition that we are all going to be more focused on – and mindful of – healthcare outcomes in future. But from an investment point of view it is a good idea to scratch beneath the surface to see the very different constituents within this diverse group of companies.’
THE COVID HEALTHCARE STORY SO FAR – THE WINNERS AND LOSERS
WHILE it is fair to say that healthcare investment has held up well during the pandemic, the broadness of the sector that Moore refers to means that different constituents have performed in radically different ways.
The sector includes drug giants such as AstraZeneca and GlaxoSmithKline, which are focused on creating – then selling – so-called ‘blockbuster’ drugs that help millions. It also embraces tiny biotechnology firms that spend years working on an exciting new gene technology with just a slight chance of success.
To give a flavour of this variety, over the years the UK stock market has played host to a medicinal cannabis company, a business developing a drug for a disease that only affected Ashkenazi Jews and a firm developing an ‘electronic nose’ to sniff out disease – and of course the business that cloned Dolly the Sheep.
Some biotech businesses flourish, others get bought out by rivals, and many sink without trace. By contrast, pharmaceutical giants are ‘safer’ investments, often providing shareholders with an attractive dividend. The sector also includes producers of much-used medical devices – from replacement hips to woundcare tape.
Since lockdown, healthcare firms have delivered a diverse range of shareholder returns depending on how close they are to the current preoccupation: Covid-19. Paul Major is portfolio manager at investment trust BB Healthcare.
He says he ‘started to get rather nervous’ about valuations in April, after the healthcare sector recovered all the losses it incurred when the pandemic caused the stock market to lurch downwards in March. He says ‘defensive’ areas such as healthcare IT and diagnostics did better than pharmaceuticals and biotechnology on the whole, adding: ‘Generally speaking, drug-related companies have not done that well.’
That said, the ‘Covid-19 effect’ is clear. For example, shares in the pharmaceutical giant AstraZeneca – buoyed by excitement at the vaccine it is trialling with Oxford University– were trading at £84 this compared with £72 a year ago. But the share price of its rival GlaxoSmithKline, which lacks a comparable vaccine candidate, is down from this time last year.
In August last year its shares were around £17. This week they closed at less than £15.
Investment trusts that focus on healthcare have also seen their performance diverge depending on the coronavirus-focus of their holdings. Biotech Growth, which counts Gilead Sciences among its holdings, has seen its shares rise from £7.68 to £12.50 in the past year.
Gilead makes remdesivir, the repurposed Ebola drug that is looking like a promising treatment for Covid-19 and Gilead represents more than 7 per cent of Biotech Growth’s portfolio. By contrast, shares in another investment trust, Polar Capital Healthcare, have risen by just 15p in the past year to £2.35 due to the lack of Covid-19 hype surrounding its investments.
WHAT’S WORTH BUYING NOW, GIVEN THE RISK?
GIVEN the divergence in performance, how should an investor get exposure to healthcare? Paul Major at BB Healthcare is focusing on companies that provide the drugs that keep people alive.
The trust’s biggest holding is Bristol Myers Squibb, which makes the anti-clotting drug Eliquis and the Opdivo treatment for lung canweek, cer. Other major holdings for BB Healthcare include Esperion, which makes products for managing cholesterol.
So far, the trust has outperformed the MSCI World Healthcare Index since the pandemic began, up 41 per cent against the index’s 26 per cent since the lows of mid-March.
Amati has two offerings for investors, a venture capital trust that focuses on early stage investments, and a smaller companies fund. Both have a healthcare focus.
Amati’s analyst Gareth Blades is excited by two businesses, Amryt and Maxcyte. Amryt focuses on rare or ‘orphan’ diseases, where patients use its drugs to control symptoms over a long time, while Maxcyte helps companies carrying out gene therapy.
He says: ‘At Amati, we’ve asked ourselves whether we think these companies have a core business outside Covid-19 that is worth investing in – and if it is one we would be comfortable holding for the long term.’
Amati’s venture capital trust has delivered a one-year return of 20 per cent, while its smaller companies fund has generated a profit of 11 per cent over the same period.
Teodor Dilov, a fund analyst at wealth manager Interactive Investor, likes investment trust Syncona, which is focused on life sciences.
He says: ‘Syncona is managed by a team with deep scientific and commercial expertise.’ Over the medium term, the trust’s shares have performed well, and Moore at Brewin Dolphin is also a fan, though he calls it a ‘risky’ investment.
He explains: ‘Syncona’s stable of businesses is a great example of biotech that will either be brilliantly successful or fail. Syncona de-risks the company development process by having medically qualified people around the due diligence table.
‘It is reasonable to expect bumps along the way, but Syncona could be a future contender for a FTSE 100 position if some of its investments start to pay off.’
Moore also rates the investment trust Worldwide Healthcare. He says: ‘It predominantly invests in US firms, but has a mandate to scour the globe for healthcare companies.
‘Risk is spread through global exposure and diversification across different healthcare sub-sectors.’
Darius McDermott, managing director of Chelsea Financial Services,
likes Polar Capital Healthcare, despite its unspectacular recent performance.
‘The team are experts in the sector and navigate well between the different sub-sectors,’ he says.
WHAT WILL HAPPEN TO STOCKS LONG TERM?
BB HEALTHCARE’S Paul Major believes stock markets will move sideways in coming months, meaning the time for big gains in healthcare may have passed.
But, for all of our sakes, we must believe the next big thing in the sector will be the announcement that we are all waiting for – an effective treatment or vaccine for Covid-19. Ailsa Craig, investment manager of investment trust International Biotechnology, is hopeful.
She says: ‘The healthcare sector’s response has been astounding. There are hundreds of ongoing clinical trials for both vaccines and treatments and we are optimistic something will be found that is both safe and efficacious so the world can get back to normality again.’ Once it does, it is vital that we will have learnt something from this pandemic: which is not to ignore health investment.
If ‘business as usual’ includes more focus on drug development, vaccine programmes and fast-track processes for drugs and vaccines for other conditions, there will be a positive outcome from Covid-19 – not just for healthcare investors, but for us all.