The healthcare opportunity

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Mitchell Fraser-Jones 1 February 2017 Est. reading: 9 min read

As our regular readers will have gathered, we have strong conviction in the long-term investment case for the healthcare industry. We believe that many companies within this sector are extremely well-placed to deliver attractive returns to shareholders, especially when you consider the low-growth global economic environment that lies ahead.

Healthcare is a vast and diverse industry with a mixture of mature, dividend-paying pharmaceutical companies and exciting, younger businesses based on incredible science and with exceptional long-term prospects.

Every investment selection we make is based on the unique attractions of that specific company but they are all united by one characteristic: undervaluation. That is as true in healthcare as it is in any other industry. Nevertheless, there are several interlinked structural long-term growth drivers that lead us to expect consistent and sustainable growth for healthcare companies of many different shapes and sizes in the years ahead. You can explore some of these drivers, such as life expectancy, demographics and growth in healthcare expenditure, using our interactive infographics below and also watch our video to hear Neil on why he is positive on the sector.

Life expectancy

Life expectancy

Life expectancy

Projected life expectancy

Years

90 80 70 60 69 72 67 67 69 69 71 66 60 72 69 64 62 73 66 70 66 90 80 70 60
1955 2055

Source: United Nations, Woodford

The scientific progress of the last few generations has been astonishing and has brought about many changes. Not least, we have seen substantially increased life expectancies around the world which, as the chart illustrates, are forecast to persist. The healthcare industry has played a pivotal role in this progress and continues to innovate and develop new treatments for some of the diseases, such as diabetes, cancer and cardiovascular conditions that have become much more widespread. These scientific advances will continue, if not accelerate, in our view. Take for example Oxford Nanopore, one of our unquoted companies, which has developed a highly disruptive, next generation DNA sequencer that enables the decoding of the human genome at a fraction of the current cost and in a fraction of the time, using a handheld device. This technology is capable of identifying medical problems much more effectively and may well support the development of new tailored medicines. Major breakthroughs like these will further improve the quality of life for patients throughout their longer lives.

Rising life expectancy is undoubtedly a societal positive but it poses great challenges for our healthcare systems which are struggling to cope with the medical demands of an ageing population. The healthcare industry is, however, becoming better incentivised to help address the heavy burden of healthcare on our economies – through innovation the industry is part of the solution, not part of the problem.

“Ageing demographics are a major driver of the secular growth in demand for pharma and healthcare, more broadly.”

Neil Woodford

Demographics

Demographics and healthcare spending growth

Developed countries

Rest of the world

Healthcare spending Population Healthcare spending per person Spending per person 0% 0% Healthcare spending per person growth Spending per person growth 0% 0% Healthcare spending as % of GDP Spending as % of GDP 0% 0% Healthcare spending Population Spending per person Spending per person growth Spending as % of GDP Healthcare spending Population Spending per person Spending per person growth Spending as % of GDP
1995 2014

Source: World Bank, Woodford
Developed countries data based on 17 representative countries where full data set is available.

In the second half of the 20th century, positive demographics were an important source of global economic growth and, for the healthcare industry, this went hand-in-hand with rising healthcare expenditure. However, population growth is now slowing (and indeed turning negative in some parts of the developed world) and, although this poses a problem for economic growth rates more broadly, the healthcare industry remains well-placed to benefit from demographic trends. Pharmaceutical companies are typically well-exposed to the parts of the world that are expected to see continued population growth, such as Asia and Latin America.

Although ageing demographics are seen as a major problem for economic growth rates more broadly, particularly in the developed world, the healthcare industry remains well-placed to benefit from population trends. This is one of the few industries that we expect to benefit from sustainable structural growth in the years ahead.

“We can only really see one answer to the conundrum, which is that economies need to spend more on drugs in order to reduce the overall healthcare cost. So, the industry has an incentive to bring forward better therapies.”

Neil Woodford

Health expenditure

Health expenditure

Health expenditure as % of GDP

Health expenditure per capita

Spending on healthcare as % of GDP and per capita

20% 15% 10% 5% $5K $10K 13.09 3.79 7.44 2.26 9.43 3.13 10.11 2.74 4.96 0.09 8.86 1.83 8.13 2.84 9.55 2.87 7.42 0.88 7.96 2.29 6.69 1.36 7.44 1.13 6.62 2.84 7.72 2.70 7.10 1.46 7.26 1.59 7.85 2.01 of GDP $ Health expenditure per person 20% 15% 10% 5% $5K $10K of GDP $ USD Health expenditure per person
1995 2014

Source: World Bank, Woodford

As the chart above demonstrates, the healthcare industry has been enjoying structural growth for years and we are convinced that the drivers of that growth remain firmly in place. Recently, however, the issue of ‘healthcare inflation’ has come under the spotlight, particularly in the US with first Hillary Clinton and now President Trump, keen to take action on rising drug prices. While some of their concerns are legitimate, it is important to remember that the vast majority of healthcare budgets are spent on things other than drugs, such as hospital care and clinical services. In the US for example, prescription drugs account for approximately 10% of total healthcare spend.

In order to manage the overall healthcare burden, governments need to encourage innovative therapies that have the potential to reduce overall healthcare expenditure. These include new therapies that help to keep people out of hospital or advances in treatments that turn health conditions that were previously seen as terminal, into chronic or even curable conditions.

The opportunity

Neil’s positive prognosis

Listen to Neil explain why he expects structural long-term growth from the healthcare industry, despite the global economic challenges.

Despite the extraordinary commercial opportunity that lies ahead for the healthcare industry, valuations are attractive and have become increasingly so over the past eighteen months. In fact, on some measures, the sector hasn’t been as attractively valued as it is currently since the early 1990s. For many companies, current share prices imply negative terminal growth rates in the years ahead which suggests an industry in decline. Our expectation is for long-term growth, so the current opportunity is significant in our view and we are confident that the portfolios are extremely well-positioned to capture the long-term potential.

Healthcare in the funds

To help you better understand the depth, breadth and quality of the healthcare exposure within the funds, we’ve provided some detail below about each company. You can browse by therapeutic area and by stage of development across the LF Woodford Equity Income Fund and the Woodford Patient Capital Trust.

  • Equity Income Fund

View: Therapeutic area | Development stage

Patient Capital Trust

weight %
Reset

Patient Capital Trust

Source: Northern Trust as at 31/12/16

What are the risks?

  • The value of investments and any income from them may go down as well as up, so you may get back less than you invested
  • Past performance cannot be relied upon as a guide to future performance
  • The ongoing charges figure is charged to capital, so the income of the funds may be higher but capital growth may be restricted or capital may be eroded
  • The funds may invest in other transferable securities, money market instruments, warrants, collective investment schemes and deposits – some of these security types could increase the funds’ volatility and increase the level of indirect charges to which the funds are exposed
  • The funds and trust may invest in overseas securities and be exposed to currencies other than pound sterling – as a result, exchange rate movements may cause the sterling value of these investments and the income from them, to fluctuate
  • The LF Woodford Income Focus Fund will be invested in a concentrated portfolio of securities – the fund is not restricted by reference to any geographical region, sector or market capitalisation
  • The LF Woodford Equity Income Fund and the Woodford Patient Capital Trust may invest in unquoted securities, which may be less liquid and more difficult to value, because they are generally not publicly traded – the lack of an open market may also make it more difficult to establish fair value
  • The price of shares in the Woodford Patient Capital Trust is determined by market supply and demand, and this may be different to the net asset value of the trust. This means the price may be volatile in response to changes in demand
  • Long-term outcomes are more binary – extremely attractive rewards for success but some businesses will inevitably fail to fulfil their potential and this may expose investors to the risk of capital losses
  • Young businesses have a different risk profile to mature blue-chip companies – risks are much more stock-specific, which implies a lower correlation with equity markets and the wider economy – it can take years for young businesses to fulfil their potential, this investment requires patience

Important information

Before investing, you should read the Key Investor Information Document (KIID) for the fund – or Key Information Document (KID) for the trust – and the Prospectus which, along with our terms and conditions, can be obtained from the downloads page or from our registered office. If you have a financial adviser, you should seek their advice before investing. Woodford Investment Management Ltd is not authorised to provide investment advice.

The Woodford Patient Capital Trust currently intends to conduct its affairs so that its securities can be recommended by IFAs to ordinary retail investors in accordance with the FCA’s rules in relation to non-mainstream investment products and intends to continue to do so for the foreseeable future. The securities are excluded from the FCA’s restrictions which apply to non-mainstream investment products because they are shares in an investment trust.

The Woodford Funds (Ireland) ICAV (the “Fund”) has appointed as Swiss Representative Oligo Swiss Fund Services SA, Av. Villamont 17, 1005 Lausanne, Switzerland. The Fund’s Swiss paying agent is Neue Helvetische Bank AG. All fund documentation including, Prospectus, Key Investor Information Documents, Instrument of Incorporation and financial reports may be obtained free of charge from the Swiss Representative in Lausanne. The place of performance and jurisdiction for all shares distributed in or from Switzerland is at the registered office of the Swiss Representative. Fund prices can be found at www.fundinfo.com.

 

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address 9400 Garsington Road, Oxford OX4 2HN.

Woodford Patient Capital Trust plc is incorporated in England and Wales, company number 09405653. Registered as an investment company under section 833 of the Companies Act 2006. Registered address Beaufort House, 51 New North Road, Exeter, EX4 4EP.

© 2019 Woodford Investment Management Ltd.
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