“In my very long career investing in healthcare, I have never seen so many exciting discoveries,” said Sam Isaly, manager of the Worldwide Healthcare Trust (LSE: WWH) at its recent AGM. In the last year, the healthcare sector’s return of 13% has been overshadowed by the technology sector at 33%, but that may be changing. Though returns in 2016 were held back by a dip in new drug approvals, some research disappointments and political uncertainty, they are already higher in 2017. WWH, for instance, having returned only 5% in 2016 (just a third of its annual target), has already returned 21% so far this year.
Isaly’s optimism is based not just on the accelerating pace of innovation, but also on valuations, long-term growth in healthcare spending, and the prospect of an increase in merger and acquisition activity from pharmaceutical companies. Large-cap biotech companies in the US are valued at just 13 times prospective earnings, a record discount to the S&P 500 index at around 17.5 times. Healthcare spending, currently 18% of US GDP and 10% in the UK, is expected to continue to rise as a share of rising GDP in all developed markets. In emerging markets, it is growing much faster, with spending on prescription drugs growing at 14% annually.
Regulatory approval for Swiss pharmaceutical company Novartis’ novel CAR-T cell immunotherapy for leukemia has caused a stir in the sector, but Isaly is cautious in the short term, not least due to its $475,000 cost. He chooses to focus instead on gene therapy, oncology, and obesity-related diseases such as diabetes. His colleague Sven Borho focuses on treatments for cystic fibrosis, with positive news already announced by American pharmaceutical company Vertex, and for Alzheimer’s, with confirmatory data expected next year, notably for Biogen’s promising aducanumab treatment. Biotechnology accounts for a little over a third of WWH’s £1.2bn portfolio, though a more focused investment can be gained through its sister trust, the £480m Biotech Growth Trust (LSE: BIOG), which trades on a 6% discount to net asset value (NAV).
WWH does have a rival in the £260m Polar Capital Global Healthcare Trust (LSE: PCGH). This trust trades at a small discount to NAV, but has lower debt levels, much less money invested in biotech (just 14% of the portfolio) than WWH, and no emerging-market exposure. This makes it lower risk, but also lower reward; the five-year return of 100% is less than half that of WWH. Alternatively, the BB Healthcare Trust (LSE: BBH) raised £150m earlier this year, £53m subsequently and another £63m in a recent fundraising, despite underwhelming performance. Its management company, Bellevue Asset Management, has yet to prove itself with this vehicle. Purists will gripe at a yield of 3.5% paid almost entirely out of capital, but this artificial yield is what has attracted investors in preference to the better-performing competitors.
Isaly is proud that WWH has multiplied investors’ money 30-fold in its 22 year life, but is understandably disappointed that, in dollar terms, two-year returns to the end of July were flat. Despite this, investors should take the opportunity to buy into an exceptional trust in an undervalued growth sector.
Activist watch
A group of US activist investors has threatened to vote against the proposed merger between Swiss chemicals company Clariant and US-based Huntsman Corp, jeopardising a deal that would create a $15bn chemicals giant, says Brian Blackstone in The Wall Street Journal. White Tale, whose 15.1% holding makes it Clariant’s largest shareholder, is made up of activist funds 40 North and Corvex Master. In a letter to Clariant’s board last week, the activist group said that it remains convinced that the proposed merger would be detrimental to Clariant shareholders, and questions suggested cost savings. White Tale has urged the chemicals company to hire an investment bank to evaluate alternatives to the deal.