Vice president and portfolio manager at Brompton Funds spotlights several macro trends and near-term opportunities
For the vast majority of investors right now, the reality of COVID-19 is probably the strongest argument for healthcare investment. But as one PM notes, that’s far from the only tailwind blowing in the sector’s favour.
“At a macro level, I think there are three pretty significant tailwinds that will be driving the sector for at least the next decade,” says Michael Clare, vice president and portfolio manager at Brompton Funds, which manages the Brompton Global Healthcare Income & Growth ETF.
The growing population of people over 65, Clare says, bodes well for healthcare as that demographic tends to rely on healthcare products and services three times as much as people who are younger. And with the middle-class population expected to nearly double between 2015 and 2030, he also expects spending on healthcare to rise, with growth being more pronounced in emerging markets where healthcare spending currently makes up a smaller proportion of GDP. Beyond that is the continuing cycle of innovation across different areas including immuno-oncology, medical devices, and tech-enabled healthcare delivery.
Citing a December research note by Brompton Funds, Clare notes how estimates of revenue for vaccine makers have come up significantly over the past couple of years.
In November 2020, COVID-19 vaccine revenue estimates for Pfizer were projected to reach roughly $15 billion for 2021; a year later, that estimate was revised to around $35 billion. It was the same story for Moderna, albeit to a lesser scale, as 2021 COVID-19 vaccine revenues estimated for the company went from roughly $12 billion in November 2020 to more than $15 billion a year later.
That rise, he points out, doesn’t yet even factor in the upside potential represented by a possible ongoing need for annual or seasonal COVID vaccinations.
“If we look at the 2023 estimates comparable to initial 2021 estimates, we’re seeing more out-year revenue potential that we weren’t expecting before the success of these vaccines became apparent,” Clare says.
There are different ways to subdivide the healthcare space, but Clare finds it useful to draw a line between pharmaceuticals and non-pharmaceuticals. Non-pharma stocks, he says, are arguably the best way to catch the tailwinds, as drug companies are exposed to a cocktail of external risks from pricing reform, patent cliffs, and drug trial failures – especially dangerous for small-cap companies, but also significant for large-cap firms.
Brompton’s healthcare portfolio, Clare says, is overweight toward healthcare devices like artificial hips and knees and heart valves. Alongside the breathtaking rate of innovation and product development – increased R&D spending going back to 2015 has yielded some exciting forms of minimally invasive technologies, like heart valves that can be implanted without the need for open-heart surgery – is an expectation that procedures involving those interventions will rise as the trend of an aging population takes hold. More immediately, he also anticipates a boost in the number of procedures in the short term, possibly in the later months of 2022.
“Some of these procedures were obviously postponed during COVID because a lot of them, particularly on the orthopedic side, are considered to be elective or non-urgent surgeries. Those procedures initially fell in 2020,” Clare says. “We thought they were going to come back in 2021, but then the Delta variant emerged, and now we have Omicron. … Hospitals are struggling right now, so as we progress to the second half of the year, things are probably going to get closer to normal, and we see an opportunity for a catch-up period in the near term.”
Another healthcare group favoured by Brompton’s portfolio management team are the companies in the business of providing life science tools, diagnostics, and testing solutions. While the base business for those companies were reduced initially during the onset of the pandemic, they were later able to offset that as COVID-related work such as PCR testing and bioprocessing of materials related to vaccine development.
“Now as we're getting back to normal, we’re seeing a recovery in the base business, but we're still seeing COVID-related work too. … COVID testing is probably at an all-time high right now, and that's likely to continue,” he said. “Now you've got this group of companies that was growing 4% to 6% on average pre-pandemic in revenues, and that was amped up to about 8% to 10%. So we think revenue growth is poised to be within the mid- to high single-digit range over the medium term.”