Laurie Don

Healthcare investing in a post-Covid world

Laurie Don

With vaccines and roadmaps out of lockdown allowing the world to start looking beyond Covid-19, one hope is that the pandemic has opened people’s eyes to the importance of getting healthcare right.

Lessons learnt over the course of such a challenging 12 months, and continuing to be absorbed every day, should encourage greater understanding of how best to manage health in the years ahead. Our focus as sustainable investors is on a cleaner and safer world in the future but we also stress that people have to be healthy enough to enjoy this. In broad terms, the key is to take a more proactive stance in monitoring and preventing disease before it occurs. Although this may feel expensive, it is far cheaper and ultimately better in terms of patient outcomes than dealing with illness later. This does require a major shift in both mindset and approach, however.

We also hope the pandemic has changed people’s perceptions of a healthcare sector that continues to comprise a large portion of our Sustainable Future (SF) funds. Historically, the industry has come under scrutiny for charging to provide health products and services but, crucially, we are coming to understand this money can be spent well and is likely to be a valuable investment for a more sustainable future.

Before looking beyond Covid, however, it is important to recognise the huge role healthcare businesses have played in combatting the virus, moving quickly to an emergency footing. The pandemic has underlined the industry’s importance, with the urgent need for action on Covid-19 forcing experts, pharmaceutical companies, governments and regulators around the world to rally together quickly to provide solutions. The most critical step was the development and distribution of vaccines and these began to come to market around a year after the need was first identified. This was in stark contrast to the traditional timeline for development, trialling and production of around 10 years – clear evidence that necessity is the mother of invention.

There has also been a focus on testing and therapeutics: testing to isolate those with the disease and monitor ongoing dynamics of its spread (as well as the mutations that continue to be of concern), and therapeutics to lessen the burden on individuals and healthcare systems by reducing the severity of the virus for those that contract it. Providing such solutions has seen many healthcare companies experience a boost to revenues in those specific areas of their business and, depending on the breakdown of their operations, some have benefited more than others. If we look at companies like ThermoFisher Scientific and PerkinElmer in the US, for example, revenues from Covid-related areas have grown more than enough to offset falls in other parts of their business that are more economically sensitive and therefore shut or significantly slowed down during lockdowns.

Our stance on some of these companies is already changing, however, and we recently exited our position in PerkinElmer. The company was a strong performer over 2020, as well as for the last few years, and, after reviewing the price target, we felt upside was limited on a five-year view. We also noted that 40% of 2020 earnings came directly from Covid testing, which we expect to become more nuanced over time as mass testing becomes less vital.

In managing our SF portfolios, we start by looking for companies that address major societal themes over time including Enabling innovation in healthcare and Providing affordable healthcare. Over the coming years, as the world recovers from and moves beyond Covid, we expect healthcare companies to continue to do well by doing good. Roche, for example, has seen significant demand for its diagnostic machines during the pandemic and we believe it will continue to expand its global footprint. Even as levels of Covid-19 testing fall, these machines will be put to work to scan for other serious diseases where governments have been less keen to invest the initial outlay, such as Tuberculosis or Hepatitis C.

Taking a step back, there are many drivers behind the growing importance of investment in the healthcare sector: the ageing population is key but more significant is the step change required in technologies that help treat disease more effectively. Companies like Illumina, which we added to our funds last year, continue to drive down the cost of understanding the human genome. This allows experts to tailor therapies more precisely to individual needs and with fewer side effects, reducing the burden on the healthcare system.

Traditionally, the treatment model has a large element of trial and error, with people seeking help when they feel ill and hoping whatever drug or procedure prescribed is effective but this intervention often proves too late. In contrast, we are moving towards a more personalised system where we can understand how someone’s genetic make-up leaves them vulnerable to certain diseases, and this is opening up new ways to counter conditions such as cancer, dementia and Parkinson’s.

Key areas to watch include gene therapies – promising to be a one and done cure for disease (versus the traditional pharmaceutical model of taking a pill regularly for the rest of your life) – and liquid biopsy, which enables the early detection and monitoring of cancer and other diseases through blood draws rather than complex and intimidating solid tissue samples. This paves the way for early diagnostics and pre-emptive treatment, testing babies before birth and adults early and on an ongoing basis. We expect the price of sequencing the genome will continue to fall, with equipment for these tests more prevalent and testing more convenient. Ultimately, we will see more targeted vaccines: mRNA technologies can help treat cancer, for example, moving the industry beyond more traditional ‘vaccinated’ areas.

We wrote recently about GW Pharmaceuticals, which we have owned since shortly after launching our SF funds in 2001, and, in many ways, our experience with this company encapsulates the patience often required in healthcare investing. GW is the global leader in developing cannabinoid-based treatments, changing the lives of many people with epilepsy, but its groundbreaking Epidiolex product was only approved by the US Food and Drug Administration in 2018 and added to the NHS’s prescribable drugs the following year. It took nearly two decades for the company to reap the rewards of its investment in science and manufacturing. Recognising this expertise, Irish-based Jazz Pharmaceuticals has agreed a $7.2 billion deal to acquire GW and expand its neuroscience portfolio. The deal completed in May and will see the company leave our portfolios.

While healthcare companies are currently at the forefront of the public eye because of their efforts against Covid-19, we invest in the sector because its innovation remains vital for a more sustainable future. People need to be healthy enough to enjoy the cleaner and safer world our companies help to create and we will continue to invest in businesses that are innovating, working to address unmet medical needs, and ensuring healthcare solutions are available to the widest possible cross-section of the global population.

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Monday, June 28, 2021, 10:50 AM