Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Samuel D Isaly, portfolio manager of Worldwide Healthcare Trust and Partner at OrbiMed Capital LLC.
At the start of this year, valuations in the healthcare sector were at record lows, with high dividend yields providing significant downside protection. But the sector has largely outperformed since then. For the year to 19 July 2011, US healthcare gained 11.73%, making it the second-best-performing sector behind energy (14.03%). Meanwhile, the S&P 500 gained just 6.59%.
Future growth will be founded on rising incomes, demographics and innovation. In the US, healthcare spending is four times higher for people aged over 65 than for those under 65. In China, the elderly population is expected to double by 2025. And as people get richer, they spend more on their health. Indeed, we expect spending on healthcare to outpace GDP, especially in emerging markets. Seven emerging economies account for 46% of the world’s population, but only 10% of global healthcare spend. This discrepancy will narrow as living standards improve. Already, emerging markets account for more than a third of the growth in global pharmaceuticals, with China’s market growing two to four times faster than Western ones. The following firms are all set to benefit.
One of the most novel new drugs around is Gilenya, the first oral medication for multiple sclerosis. It was discovered by Mitsubishi Tanabe Pharma Corp (JP: 4508) and is licensed to Novartis. Gilenya represents a sea change in the treatment of MS, given its unmatched efficacy and its availability in pill form. Mitsubishi Tanabe sells a mix of products in Japan, from primary-care medicines to speciality biologics, and its robust pipeline also contains products for global distribution such as Gilenya. This drug is now approved in the US and Europe, from which the firm will collect an important royalty on sales. It also has a global out-licensing deal with Johnson & Johnson for canagliflozin, a drug that treats diabetes. This is another potential blockbuster that could transform its profit base. Another product, telaprevir, is an add-on therapy for the treatment of hepatitis C. Mitsubishi Tanabe owns exclusive rights to it throughout Asia including China, which houses the largest number of infected patients in the world.
Another key drug with blockbuster potential is Benlysta for the autoimmune disease lupus, discovered by Human Genome Sciences (Nasdaq: HGSI), and marketed by GlaxoSmithKline. Benlysta is the first drug in 50 years to be approved in the US to treat lupus. We expect it to grow to more than $1bn in annual sales – thus we are bullish on prospects for Human Genome Sciences.
Meanwhile, there is a revolution brewing in DNA-sequencing and personalised medicines. It used to cost hundreds of thousands of dollars to sequence a person’s DNA, but the cost has now fallen to about $3,000. We expect the amount to come down by another two-thirds. Illumina (Nasdaq: ILMN) makes machines that sequence DNA. It was one of our most successful portfolio companies last year. We also own companies that benefit from DNA-sequencing. One example is Sequenom (Nasdaq: SQNM). Sequenom has used Illumina’s HiSeq 2000 instruments to develop a blood test to diagnose Down’s syndrome. This avoids the risks to babies associated with amniocentesis, so we expect pregnant mothers will insist upon this remarkable new technology.