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It’s a good time to buy into healthcare

Don't wait for things to settle down in the markets. Max King explains why now's the time to snap up some healthcare bargains.

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Big pharma will buy in their research

The EpiPen controversy, in which pharmaceutical company Mylan was vilified for raising the price of its treatment for allergic reaction by 400%, caused share prices across the healthcare sector to drop sharply. A few days later, promising results from trials of Biogen's aducanumab, a potential breakthrough in the treatment of Alzheimer's, were treated with indifference by investors. When bad news is contagious but good news is ignored, a long-term opportunity for investors usually beckons.

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OrbiMed is the specialist healthcare manager behind Biotech Growth Trust (LSE: BIOG) and its larger, more diversified sister, Worldwide Healthcare Trust (LSE: WWH). At the former's July annual general meeting, OrbiMed's co-founder, Sven Borho, put worries about US drug pricing into context. On the political aspect, Borho pointed out that previous Democratic administrations have failed to centralise payments and control prices, even when Democrats controlled both houses of Congress and the presidency. That outcome looks highly unlikely in November.

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Meanwhile, in terms of cost, drug spending currently accounts for about 10% of US healthcare costs, a similar level to 1960 and broadly unchanged since 2000. Generic drugs account for 90% of US prescriptions, with prices of branded drugs typically dropping 95% when patents expire. While innovative new drugs such as Sovaldi, Gilead's treatment which cures hepatitis C, appear ruinously expensive, the cost of treatment is actually significantly lower than for less effective hospital care.

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Meanwhile, medical innovation has accelerated, with 45 new drugs approved in the US in 2015, equalling the highest number ever. The sequencing of the human genome has made gene editing possible, while the development of monoclonal antibodies is overcoming the resistance of the human immune system to conventional antibodies. As a result, "the treatment of cancer is advancing rapidly", rare diseases are becoming treatable, and deadly infectious diseases, such as Aids, have become controllable chronic conditions.

Despite the promise of sustained growth, large-cap biotech companies, such as Biogen and Gilead, are trading at a significant valuation discount to the S&P 500, says OrbiMed. This could lead to a "mergers and acquisitions frenzy", with cash-rich but research-poor big pharmaceutical companies seeking to expand their product pipelines.

Barely a third of BIOG is invested in emerging biotech companies, relative to nearly two-thirds in profitable, cash-generative major companies that are not dependent on share issuance for long-term funding. At WWH the emphasis is on large caps, which account for 71% of the portfolio, but not on names such as Pfizer, Merck and Glaxo, which have a poor recordof innovation.

Performance in the last year has been dull. WWH returned 11%, due to a weak sterling, with BIOG down 6%. However, over five years the former has returned over 200% and the latter over 300%. Given that WWH launched at £1 in 1995 and now trades at around £20, this has been a fund to buy and lock away.

The driver behind both funds is simple: people's desire to live longer and healthier lives. Governments are concerned about value for money in healthcare, but curtailing spending is not a vote winner. The visibility of long-term growth merits a higher price for both trusts, which currently trade on a discount to net asset value of 6.5%. Waiting for post-election clarity is likely to result in a missed opportunity.

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