How attractive is the healthcare sector for investors now?
11:12, 20 January 2022
This week saw major stock movements in some of the biggest names in the healthcare industry as a bidding affair unfolded between two consumer healthcare majors – GSK and Unilever.
There might have been some quick gains for those trading on the back of this potential acquisition, but for investors looking at the broader sector what is there to whet their risk appetite right now?
Capital.com probes analysts to see if there are any good opportunities to invest in the sector or are the valuations somewhat stretched?
GSK turns down Unilever’s bid
On Monday, GSK’s stock price went up 4.55% in early morning trade to 1,715.63p while Unilever’s stock price was down 6.86% to 3,666.50p. The moves were an immediate reaction to the news that GSK had turned down a £50bn bid from Unilever for the GSK-Pfizer consumer business.
Yesterday, Unilever released a statement that it would not increase its offer above £50bn and insisted it would not change its view on the firm’s fundamental value.
The Unilever stock price rose slightly since then to around the 3,720p mark, perhaps reflecting some analysts’ views that Unilever’s valuation of the business was already at the top end and also over concerns on how the acquisition would be financed.
On the flip side, GSK’s stock price fell following Unilever’s announcement – down to the 1,635p mark mid-morning today.
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Hidden gems in a huge sector
Back in the spotlight, and given the size of the healthcare sector and the variety of companies in it, it is hard to imagine a time when investors couldn’t find a few gems.
As James Cooke, director of investment and head of global equities at Ashburton Investments explains: “Healthcare spans a number of areas from the conservative relative low volatility to high-risk biotech. While there are some areas of overvaluation, in particular, we believe that in the diagnostics space, there are certainly good opportunities.”
AstraZeneca, who notably produced their Covid vaccine on a not-for-profit basis during the pandemic, for example, remains a favoured stock in the Ashburton Global Leaders Equity Fund.
“The company offers one of the highest de-risked growth prospects of mega capitalisation pharmaceutical companies, with a young portfolio of approved products likely to be approved in other clinical settings,” says Cooke.
“Within the medical devices space, Smith & Nephew stands out as a company on a steep discount to peers and looks set to benefit from a return of elective procedures. Hip and knee operations have been deferred rather than cancelled and there is substantial pent up deferred demand,” adds Cooke.
He believes that while mergers and acquisitions within orthopaedics would not be possible given high industry concentration, the company would make a good acquisition for a large medical devices company looking to enter the space.
Dr Gareth Blades, an analyst at Amati Global Investors, picks out two pharma names – US company Indivior and UK-based Amryt.
Amryt Pharma’s Filsuvez is seeking approval from the Food and Drug Administration in February this year for Filsuvez is a topical gel that can be applied at home by dystrophic epidermolysis bullosa (EB) sufferers. It claims to significantly increase the speed of wound healing in cases of EB.
Dr Blades believes approval would provide an additional boost to a business that he says had already impressed after a challenging period.
Dr Blades adds that Amryt had something of a chequered history as the merger with a US company Chiasma was a complicated transaction. But he said that the firm has now gone through the process of taking out all the excess costs.
“…for instance moving operations out of Boston which was very expensive. They have a highly effective sales model in place now and have had three or more upgrades to full-year numbers.”
Some turnaround stories
Indivior is a different story – but another example of a turnaround. As Dr Blades explains, in 2020, the company hit a low point when it was fined and its then chief executive Shaun Thaxter pleaded guilty to FDA charges of misbranding its opioid drug Suboxone.
Suboxone was a drug product approved for use by recovering opioid addicts to avoid or reduce withdrawal symptoms while they undergo treatment.
“The Indivior CEO was fired and the company then had to show its internal processes were watertight. It is probably the most heavily audited company in the sector now. It has seen steady growth in sales and its drug, Sublocade is very successful and could easily become a billion-dollar drug. There is currently no competitor in the market to it.”
Sublocade is used to treat adults with moderate to severe addiction (dependence) to opioid drugs.
Moritz Sitte, co-manager of the Baillie Gifford European Growth Trust, recently bought a stake in Dassault Systemes.
“Over more than forty years, Dassault has built an enviable reputation amongst its customers as a leading provider of 3D project management software. It started out in serving the aerospace and auto industries, and is now trying to achieve similar success with customers in the healthcare sector,” said Sitte.
“Dassault is digitising this huge industry by introducing software to run clinical trials much faster than in the past; 60% of covid vaccine trials were run using Dassault’s Medidata software platform,” added Sitte.
Impact of Covid
Tackling waiting lists is an ongoing challenge not just in the UK but globally, which has been exacerbated by the Covid-19 pandemic.
Dr Blades explains that one obvious way to tackle lists quickly was by improved diagnostic and screening tests. Renalytix, a company favoured by Dr Blade, identifies the risk of diabetes. “… (it) had a high rating but has come off a lot. Over 18 months to two years, that company is capable of significant cash generation,” he said.
In terms of valuations he says there has been something of a sell-off – notably amongst some of the earlier-stage businesses.
“These businesses continued to operate during the pandemic but didn’t have the sales reps out on the road selling,” adds Dr Blade. But, as lockdowns are phased out, this situation changes and companies such as Renalytix are well placed.
“They have built up sales rep numbers, invested in IT and have all they need to drive revenue growth. Significantly, they will be able to get into hospitals now too. Once again, this is a company that has very little competition in its market.”
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