Q&A - James Cheo Investment Strategist Bank of Singapore
The structural forces of an ageing population and rising affluence make the healthcare sector a solid long-term investment. More importantly, mankind’s deep desire for living longer and healthier lives would mean that healthcare demand will continue to be unassailable for the decade to come, even if the repeal of Obamacare is successful. The main impact would likely have reduced the number of insured patients – a negative for the healthcare market, especially for the healthcare insurers.
Why are the fundamentals of the healthcare sector good?
Fundamentally, healthcare continues to benefit from improving pipeline productivity with an increasing number of new therapeutic drugs approved by FDA. Also, valuations remain relatively undemanding while M&A activities provide potential upside catalysts. We continue to remain tactically overweight on the healthcare sector. But needless to say investors need to be selective on companies that are focused on therapies that are relatively less impacted by pricing pressures.
How can we invest in the healthcare sector?
Other than investing in public markets, investing in private equity that focuses on healthcare is one of the best ways to reap the long-term benefits of the sector.
In the search for diversification and higher returns, there is a need for investors to deploy into “patient capital” – less liquid investments such as private equity. Typically, private equity often has restrictions on withdrawals for seven to 10 years before fully returning capital and profits to investors. However, in exchange for holding for a longer period, investors are compensated with higher returns or an “illiquidity” premium.
Investing in a healthcare mutual fund is a good proposition, especially for investors who are not willing to commit to a long investment horizon. Healthcare investing is very specific and requires a specialized knowledge of the healthcare industry.
Healthcare ETFs based on standard rules such as market capitalization are not adequate for healthcare investing as there could be regulatory changes and drug approvals that will create winners and losers in the healthcare industry.
Where are the investment opportunities in healthcare?
The field of immuno-oncology (IO) offers several new drugs with large market potential, and the leaders in the field are likely to control a disproportionate market share. The leaders in IO drug development are the large, diversified companies, and IO is becoming increasingly important for these firms. These companies will have the first-mover advantage and can potentially develop strong moats of sustainable competitive advantage in cancer treatment.
We expect global sales of IO drugs to reach US$28 billion by 2021, ahead of consensus expectations of US$22 billion. While our market share expectations by company are similar to consensus, we expect the overall market to be 25% larger. With annual pricing close to US$150,000 per year, IO drugs hold strong pricing power over genericized chemotherapy and first- generation targeted drugs.