the portfolio of GAM Investments’ Christophe Eggmann as he looks to the US for the most innovative names in the healthcare sector.
Interest in the healthcare sector has begun to surge in recent years as scientific developments have opened up new areas of research and therapy.
It has also been a lucrative area for investors, with the MSCI World Health Care index up by 353.3 per cent over the past 20 years, in sterling terms, compared with a 224.2 per cent gain for the broad MSCI World index.
Performance of indices over 20yrs
Source: FE Analytics
And Eggmann, who is manager of the GAM Multistock Health Innovation fund, said he is finding the best opportunities in the US, where the greatest examples of innovation are located and 84 per cent of its portfolio is invested.
They are to be found lower down the market capitalisation scale too, he said, where there are a range of companies at different stages of development that are also potential takeover targets for larger players.
The GAM manager said innovation in the sector remains one of the most important drivers of growth and value creation across the healthcare industry, noting that scientific developments and the product pipeline continue at rapid pace.
“M&A activity has picked up as we anticipated; we have seen two cash and stock deals of a high transactional value so far this year, but also three much smaller all-cash transactions, which reflect the trend of large-cap companies seeking to buy innovation through acquisition-based expansion,” he added.
Eggmann said there are two major themes at play in the portfolio: gene therapy and digital health.
Gene therapy, said the manager, is the “greatest industry development in the last 30 years”, adding: “as recently as five years ago, it was considered more akin to science fiction.”
He said it has now become a practical therapeutic solution with the potential to revolutionise the healthcare industry.
“The latest stage of development has been to find new payment models that are patient and system-friendly,” the fund manager explained.
The main difference between gene therapy and traditional therapeutic solutions are the time frames involved.
Eggmann said the former is a therapeutic cure, rather than an ongoing ‘for life’ treatment and as such the upfront costs are much greater and something insurers are not currently able to reimburse. Nonetheless, gene therapy is significantly cheaper in overall terms, he noted.
Another difference is that the potential outcomes of gene therapy are “clearly polarised”, meaning that the former is more performance- and value-based than traditional drug therapy, which only aims to treat the symptoms of disease.
“In terms of cost analysis, gene therapy can also be assessed on the basis of four different criteria – quality of life improvement, extension of life, societal value and overall cost reduction in comparison with the ‘for life’ cost of traditional therapies,” he said.
The second major theme is digital health, which also includes the application of machine learning and artificial intelligence.
“A very useful example lies in the detection of oHCM, which is a comparatively rare but heritable, disease of the heart muscle that increases the risk of heart failure, stroke and sudden death,” said Eggmann.
“In terms of prevalence, the disease affects approximately one in 500, suggesting that there are around 600,000 sufferers in the US and the previous diagnostic rate was, at best, around 20 per cent.
“The digital approach involves incorporating a non-invasive optical sensor into commercial smart watches to detect blood volume at the surface of the skin. In trials, this automated, machine-learning classifier detected oHCM patients with a 95 per cent sensitivity and a 98 per cent specificity.”
For investors considering an allocation to the healthcare sector, however, there are some issues that need to be taken into consideration.
Performance of index in 2016 to presidential election
Source: FE Analytics
With a presidential election looming in 2020 to be fought by controversial US president Donald Trump, perhaps against a populist from the left, healthcare may become a political football during the campaign, as it was in 2016.
As the above chart shows, the Dow Jones US Health Care Total Stock Market index was down by 4.78 per cent during 2016 to the 8 November presidential election as Donald Trump and Democrat Hillary Clinton clashed over healthcare reform.
Eggmann said: “We feel investors in the sector would be wise to look towards more defensive businesses in the run-up to the 2020 US presidential election – as we experienced in 2016, speculation over limits on drug pricing and industry regulation in an election year has the capacity to spook investors.”
The GAM Multistock Health Innovation Equity targets long-term capital growth by investing globally in innovation-driven companies active in all healthcare sub-sectors, including: pharmaceuticals, biotechnology, healthcare services & supplies, medical technology, specialty pharmaceuticals and generics.
Top holdings include US antiviral drugmaker Gilead Sciences (6.6 per cent), biopharmaceutical company Pfizer (6.5 per cent), and Swiss firm Novartis (5.6 per cent).
On a sector basis, its largest exposure is to biotechnology, which represents 42.8 per cent of the portfolio. A further 35 per cent is invested in the pharmaceuticals sector.
Performance of fund vs sector & benchmark under Eggmann
Source: FE Analytics
Under Eggmann, the GAM Multistock Health Innovation Equity fund has made a total return of 371.31 per cent, compared with a 256.23 per cent gain for the MSCI World/Health Care benchmark.
The $153.3m fund has an ongoing charges figure (OCF) of 1.80 per cent.