Investing in healthcare innovation
The Worldwide Healthcare Trust provides investors with access to exciting opportunities, says Max King.
The Worldwide Healthcare Trust provides investors with access to exciting opportunities.
Sven Borho, manager of the £1.5bn Worldwide Healthcare Trust (LSE: WWH), had a cheering message for his mainly elderly audience at the recent annual general meeting. "The pursuit of the Holy Grail, an effective treatment for Alzheimer's disease, is really heating up," he said. That illustrates a key attraction of investing in healthcare. Not only do investors stand to make good returns, but they get to hear plenty of good news about their chances of a long, healthy and cognitive life.
"There are 5.7 million Americans diagnosed with Alzheimer's more than for all cancers and it is the sixth leading cause of death, but billions have been wasted in research and development on failed programmes in the last 20 years," said Borho. But that may be about to change, thanks to the clinical progress of drugs currently in trials. Leading the field is biotechnology company Biogen, WWH's largest investment at 5.4% of the portfolio. Efficacy against markers for the disease has been proven, but now the challenge is to show cognitive benefit on a larger scale.
Why not more than 5.4%, given the huge potential market? First, because WWH also has 2.3% invested in Biogen's partner, Eisai; second, because it is "high risk";and third, there are numerous other areas that could yield drugs with annual sales more than $10bn.
Spoilt for choice
In fact, Borho is spoilt for choice. To finance the 42% of the portfolio invested in areas such as medical technology, healthcare services and emerging markets (compared with 34% in the MSCI World Health Care index), and 33% in biotechnology (compared with 12%), the portfolio is light on broad-based pharmaceutical companies. There is no exposure, for example, to GlaxoSmithKline, Pfizer or Roche. "We are at theinnovative end of the sector," says Borho, "not in thebig-cap dinosaurs."
Elsewhere, Borho is optimistic. The larger biotechnology companies offer "compelling valuations" as well as growth from new product launches. Innovation has been "tremendous" in recent years. The regulatory environment in the US remains favourable following the administration's decision to limit drug-price inflation through accelerated drug approvals rather than price controls.
Still, prices have collapsed for 90% of the prescription drugs market, thanks to the impact of generic manufacturers once patents have expired. Meanwhile, merger activity is poised to accelerate after tax reforms. Consequently, the fund is also leveraged, with 17% of net assets funded by debt.
A core holding for anyone
While modesty has never been a strong point for Borho or Sam Isaly, the manager until earlier this year, the fund's record since its launch in 1995 with just £14m to invest shows why. The annualised 16.4% return since then is well ahead of all other investment trusts, while the five-year return of 163% is way ahead of both the healthcare and the general market indices, and well ahead of the nearest competitor. There is evidence of more sluggish recent performance but, as Borho points out, "the fund's outperformance has never been in a straight line".
Like the healthcare index, the fund is heavily focused on North America, which accounts for nearly 75% of assets, while Europe is just 9% and the UK zero. Given also the low exposure to the big pharma companies, the fund provides access to reasonably-priced growth stocks; few other UK-based funds can say the same. The shares trade on a small premium to asset value, but this should be a core holding in almost any investment portfolio. Although healthcare has trailed the performance oftechnology in recent years, acatch-up is overdue.
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