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Is healthcare a defensive play right now?

Healthcare stocks have outperformed during the covid-19 pandemic.

But are investors wanting to invest in healthcare because of the increased focus on the sector and related opportunities: or is it more a defensive play right now given that stocks not very cyclical, nor overly impacted by the economy?

Dr Paul Jourdan, chief executive at Amanti Global Investors, believes investor interest is more about the opportunities within the sector rather than a tactical positioning.

He accepts that some of the momentum to sector is covid linked but insists the impact of new technology and innovation in general should not be underplayed.

“Clearly the pandemic has created opportunities for healthcare companies. In many cases the timetable has been sped up in terms of development. One of the things we have seen is that regulators can move quicker when they need to.”

Repurposing

Companies in the sector have, where feasible, looked at ways to apply research for other conditions to covid – Dr Jourdan namechecks Synairgen as a case in point. The company produces anti-viral inhalers for treatment of respiratory conditions such as COPD.

Tests showed their inhalers could also work well for covid patients. He points out that regulators are onside much quicker when there is a covid connection and for companies such as Synairgen, this can turn a five-year timeline on getting approval to one year.

However, Dr Jourdan is keen to point out that the bigger healthcare stories are not covid related.

He argues that cell therapy and gene therapy are: “Whole new areas of medicine that are becoming real”. He adds: “We are looking at 20 years-worth of research that is close to fruition and there is a queue of products in the pipeline.”

The other big area to watch, Dr Jourdan tells Expert Investor, is Artificial Intelligence and in particular applying algorithms to big data sets in medicine.  He points to Renalytix AI as a stock in this space that he has invested in and that has performed well.

“The company (a developer of AI enabled clinical diagnostic solutions for kidney disease) is on the cusp of FDA approval. The stock has gone up a long way but that doesn’t mean the story is all over – there is still good potential there.”

Dr Jourdan concedes that asset prices are expensive right now – primarily because interest rates are low so investors are predictably turning to the stock market. “There may not be any great bargains currently but there are always good opportunities in this sector,” he concludes.

His view on current valuations in healthcare are shared by, Rudi Van Den Eynde, Candriam’s head of thematic global equity, and the originator of Candriam Oncology Impact fund.

“Are valuations stretched? You could argue that some of the big names are cheap but some small caps look extremely expensive. But you have to be aware that some companies are really young – so with a new tech like gene sequencing you may have companies trading at high multiples but sometimes the price is justified.”

Van Den Eynde agrees with Jourdan that for some healthcare companies Covid has provided something of a tailwind but he also argues that for some firms it has been more of a headwind – for instance, companies linked to orthopaedics and treatments that due to Covid have been put on hold – albeit temporarily.

Focused remit

The Candriam Oncology fund was launched in 2019.  Why launch an oncology fund specifically – rather than a broader healthcare fund which includes ‘oncology’ related stocks?

Van Den Eynde’s response is that the question Candriam asked was – ‘we have biotech funds; why not have an oncology fund? Especially given the growing need for cancer research and treatment’.

As he points out global ageing is fuelling the cancer epidemic as the disease mostly comes with age. Worldwide cancer deaths are projected to increase by 60% from eight million to 13 million by the year 2030.

While there are several private equity vehicles in the oncology space – there are very few, if any, ‘niche’ funds of Candriam’s ilk.

The term ‘niche’ is probably a misnomer given the number and size of healthcare companies linked to cancer research, treatment and services.

As Van Den Eynde points out, there is a large universe of stocks (around 25,000) related to oncology (in one way or another) and not many are correlated to each other – as they are focused on their own specific area of innovation. (Immunotherapy, targeted therapy, liquid biopsies, tumour sequencing, nanotechnology, robotic surgery, artificial intelligence and Big Data are diverse areas all providing significant advances).

Despite the large number of stocks open to consideration, Van Den Eynde wants to invest in ‘conviction’ stories – that is companies that bring something new to cancer treatment. From a risk perspective he does not want exposure to some of the small or micro caps that may or may not offer stellar rewards at some undetermined date in the future.

The fund typically has a $100m market cap minimum – with currently a 2% exposure to micro-cap and 12% to small caps.  Van Den Eynde explains the thinking here: “We have a couple of micro-cap ideas where we want to put our toe in the water but these represent a very small part of the fund – we are very risk conscious. Nor do we want to be overly exposed to small caps.”

US and China

The fund is predominantly large cap (around 60%) and mid cap (approx. 25%) and not surprisingly given this scenario, is heavily comprised of US companies.

Is the dominance of US companies within the healthcare sector likely to continue? Will names from the developing world – notably China – have an increasing presence in what is a major growth market?

“China is really focussing on improving healthcare for its population,” Van Den Eynde tells EI. “Chinese healthcare companies are good at developing and manufacturing their own drugs but they are not good at coming up with, for instance, new receptors for cancer. To do this they would need a huge ecosystem of not-for-profit research to set new targets and they just don’t have that yet.”