Why you can’t afford to ignore the biotech revolution
The specialist sector will benefit from the ageing population in the developed world but faces none of the patent-expiry problems associated with pharmaceuticals, according to JP Morgan.
Healthcare is a significant component of the global economy, accounting for more than 10 per cent of GDP across many developed countries.
The sector presents a diverse range of compelling investment opportunities as ageing populations and longer life expectancy create rising demand for healthcare products and services.
By 2025, nearly 30 per cent of Europeans and 25 per cent of Americans will be over the age of 60. Globally, the fastest-growing population segment is the over 60s, with the number of people in this age group expected to almost triple to 2 billion by 2050.
Scott Braunstein, portfolio manager of the JPM Global Healthcare fund, comments: "The healthcare sector is well placed for further impressive growth, supported by ageing populations across many countries and growing healthcare spending in the emerging markets."
"We believe it may therefore be time for long-term investors to consider adding healthcare exposure to their portfolios."
"There are diverse investment opportunities – from defensive large cap pharmaceutical stocks offering solid dividend yields and expanding their business into emerging markets, through to the explosive growth prospects offered by biotech companies developing new drugs that could make a real difference to the lives of millions of patients."
Pharmaceutical stocks can offer safety in uncertain markets thanks to good dividends, strong balance sheets and relatively stable businesses, although pipelines remain challenged.
Today, many large pharma companies face a challenging outlook as patents for blockbuster drugs expire, with little sign of replacements on the horizon.
Additionally, uncertainty over US healthcare reform and government budgetary pressures continue to cast a shadow, although these worries could ease after the November 2012 elections.
In Europe where governments are the key players, market access remains difficult and public spending cuts are putting pressure on pricing, accelerating a move towards generic drugs.
The biotech sector has done well over the last decade, significantly outperforming the broader MSCI World Healthcare and MSCI World indices. It showed particular resilience during the 2008 downturn.
Performance of indices over 5-yrs
Source: FE Analytics
Global expansion and growth opportunities, high operating leverage for all biotech companies with a small sales force and low cost base, as well as M&A, have all contributed to the strong performance of the sector.
"Over the longer term, we believe that product pipelines and earnings growth potential, which have largely been ignored over the past few years, will once again move to the forefront of investors' minds when considering the pharmaceuticals sector," said Braunstein.
"We continue to be overweight in the biotech space as we expect more pipeline success and believe that the valuations of the stocks we own [are attractive]."
"Against this backdrop, the JPM Global Healthcare fund has around 45 per cent invested in pharmaceuticals and nearly 30 per cent of the portfolio invested in biotech stocks."
Performance of fund vs index over 5-yrs
Source: FE Analytics
According to FE data, the JPM Global Healthcare fund has returned 61.11 per cent over five years, marginally outperforming its benchmark. The $98.5m portfolio has four FE crowns.