Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Sam Isaly, Orbimed Capital, Manager of the Worldwide Healthcare Trust.
There are many positives on the horizon for the healthcare sector, not least the bargains available for savvy investors. Whilst other sectors of the equity markets are reaching new highs, valuations of US large-cap pharmaceuticals are trading close to historic lows – about ten times estimated 2011 earnings compared to 13 times for the broader US stockmarket. The pipeline of new drugs coming onto the market is encouraging, as the industry recovers from a fallow period spanning much of the past decade.
For example, Provenge is a treatment for prostate cancer from US-based Dendreon, a biotechnology company focused on targeting cancer. Although it is quite new, it will, we expect, save a lot of lives. Then there’s the hepatitis C treatment called Telaprevir – it’s not yet commercial, but we expect it to be soon. It was discovered by Vertex Pharmaceuticals and will be sold in Europe by Johnson & Johnson. Since this drug shortens the treatment period for hepatitis C and improves the treatment response, we expect it to be a big commercial success. A third example is the Human Genome Sciences’ Benlysta, a new treatment for lupus, a serious immunological disorder. It will be marketed globally by GlaxoSmithKline. This is the first new drug for lupus in 50 years and it should be approved soon. It changes the course of the disease because sufferers do not advance as quickly as they otherwise would. Overall, we see far greater product development and growth potential in the biotech sector rather than large pharma. Valuations are near generational lows despite excellent growth potential and very limited patent exposure.
One of our best-performing stocks has been Sinopharm Group Co (HK: 1099), the largest pharmaceutical company in China. It distributes traditional Chinese medicine as well as Western-style drugs. Sinopharm’s business model of aggressive acquisitions has been well rewarded and we expect future growth rates to remain very attractive. Over the long term the stock should benefit from demographics – in 2000, only 7% of China’s population was over 65, but by 2025 that is forecast to rise to 15%. We have also gained emerging-markets exposure through Western companies such as GlaxoSmithKline (LSE: GSK), which has growing businesses in India and China.
Another stock I would recommend is Allergan (NYSE: AGN) in Irvine, California. Allergan is the world’s leading marketer of Botox. It develops and commercialises products for eye care and one of its most intriguing offerings is Latisse, the first and only FDA-approved treatment for lengthening eyelashes. Allergan, which also focuses on neurology and dermatology, has almost 1,000 staff deployed in research and development.
Already a market leader, global powerhouse Johnson & Johnson (NYSE: JNJ) is set to continue outpacing competitors. Employing more than 119,000 people across 57 countries, it was the first of the major pharmas to emerge from its ‘patent cliff’. For J&J this fell in 2009 and 2010 compared to the wider industry low point coming in 2012. Furthermore, J&J has the best new product flow of any major pharmaceutical company. It still boasts a pipeline with several potential blockbusters in late-stage development. The company is also very well diversified across pharmaceuticals, medical devices, diagnostics and consumer healthcare.