Why are Pharmaceuticals and Biotechnology the investment opportunity for now and the future?
Global Pharmaceuticals : The Ultimate in Defensive Investments
What is a “defensive” investment? Essentially it is one that behaves better than the overall market in time of economic and market distress.
For example, look at the sectors that have performed best in the current downturn: (2/19 was when the downturn began).
Source: Industry Group Performance period 2/2019 - 23/3 2020.
Standout performers include food and consumer staples, household products, and of course
pharmaceuticals and biotechnology.
While Macrovue appreciates the value of defensive investments in a portfolio particularly in times like these, we would not be rushing to buy the companies in the consumer staples, household products, and food sectors. We believe that the best opportunities for now AND the future are in the pharmaceutical and biotechnology sectors.
Why? Well let’s look at some of the companies
Household Products: Colgate, Procter and Gamble, Kimberly Clark, Unilever
Food/ Beverages: General Mills, Heinz, Campbell Soup, Nestle, Coca Cola
These are all large successful global companies and while their sales and earnings will be affected by the coronavirus pandemic to some degree, people still have to eat and clean their houses (and themselves). Their products are necessities. Demand is relatively constant
Pharmaceuticals (and biotechnology) companies provide us with products that are also necessities (for treating pain and disease) but they tend to contain a ”secret sauce” and that is the long and varied pipeline of new drugs and expanded indications for existing drugs. There is a huge amount of “optionality” there, particularly for the so- called blockbuster drugs (over 1 billion in sales) as well as a high and sustainable growth rate as the new indications are approved for market.
Considering an Investment in Campbell Soup (CSB US)? In 3-5 years, Campbell will still be making soup whereas an investment in Merck, one of the largest and most successful pharmaceutical companies, provides the upside of its immuno-oncology programs with blockbusters like Keytruda which is currently has more than 700 clinical trials underway and is being tested for more than 30 types of cancer overall. Industry estimates have Keytruda generating over US$10.7Bn for 2019 and growing to US$17.5Bn by 2022 for a 3-year CAGR of 17.5%.
Investors also get Merck’s strong late stage pharmaceuticals pipeline, which could be worth as much as US$13-15 billion according to analyst’s estimates.
A number of drugs in the pipeline are capable of generating more than $1 billion in peak sales.
Merck’s drug pipeline value can primarily be attributed to its vaccines, and anti-infectious drugs as well as its broad internal pipeline of assets across oncology and vaccines especially Gardasil and Gardasil 9.
There is another reason why this sector and Healthcare in general should be firmly on investors
radar screens. The COVD-19 pandemic has in many ways laid bare the inadequacies of healthcare systems around the world so it’s very likely that out of necessity there will be a significant amount of money invested in this area for the foreseeable future. Who will benefit?
Well, certainly the pharmaceutical and biotech companies themselves, as well as medical device and equipment makers, and the technology companies that are spearheading the “digitisation” of healthcare.
Macrovue holds a number of high quality pharmaceutical and biotechnology companies in its 23 thematic portfolios or “Vues” and we have two Healthcare specific thematic portfolios- the top- performing “The Genomics Revolution” and Asia Pacific focused “Asian Healthcare”.
*Performance calculations are based on exit price with distributions reinvested, after ongoing fees and expenses but excluding individual tax, member fees and entry fees (if applicable). Performance is for period 16 April 2019 to 16 April 2020.
While we are great believers in thematic investing, we realise that some investors prefer a few
individual stocks to augment existing equity portfolios, so we have created a five stock “basket” to capture the significant upside of this truly global industry over the medium term.
We recommend investors buy the entire basket to get a diversified exposure to some of the most exciting trends in healthcare that are relatively immune to pandemic disruption or economic stress.
When building concentrated portfolios/ baskets whether one holds 5, 10, or even 20 stocks it is
important to be diversified by industry (or sub-industry), market capitalisation, and geography
Global Healthcare Basket: The Best of the Bes
With a market capitalisation of US$206,646Bn, Merck is one of the largest pharmaceutical
companies in the world. Merck’s major products include diabetes drugs Januvia and Janumet, cancer drug Keytruda, HPV vaccine Gardasil, cholesterol combatants Vytorin and Zetia, and hypertension fighters Cozaar and Hyzaar. In 2017, Keytruda was the first immunotherapy cancer drug based on tumor genetics to be approved by the FDA; it has been approved for metastatic lung cancer, melanoma and is being tested for over 30 other indications.
AstraZeneca (AZN LN)
AstraZeneca is a UK headquartered global biopharmaceuticals company. Astra’s R&D efforts focus on small molecules, oligonucleotides, and other emerging drug platforms, as well as biologic medicines, including immunotherapies, and innovative delivery devices. AstraZeneca has three main portfolios of specialty and primary care products - (a) Oncology (~20% of revenue), (b) Cardiovascular & Metabolic diseases (~36% of revenue), and (c) Respiratory (~23% of total revenue).
The remaining ~21% of revenues are generated via products in a number of other disease areas. 70% of group sales come from specialty indications of urgent medical need and AZN should benefit from improved adherence to inhaled respiratory medication in the age of the coronavirus.
Novo-Nordisk (NVO US NOVOB DC)
Copenhagen based Novo-Nordisk is the world's leading supplier of insulins. Diabetes & obesity care continue to generate a lion’s share of revenue (79% of sales), with modern insulin and Victoza as key growth drivers. North America contributes more than 50% of total revenues. Tresiba (a new generation insulin drug) is in the process of being rolled out across various geographies and has now been launched in the US and its oral GLP-1 diabetes therapy, semaglutide has just passed some promising tests in bringing about reduction of blood glucose and weight loss. Diabetes is a growing epidemic and the company is well placed to benefit from this trend.
Vertex (VRTX US)
Vertex Pharmaceuticals develops drugs for the treatment of cystic fibrosis, cancer, inflammatory
bowel, autoimmune disease, and neurological disorders. Essentially, Vertex Pharmaceuticals aims to cure patients with previously incurable diseases. The biotechnology firm uses an integrated, multidisciplinary approach -- employing biophysics, computer-based modelling, and functional genomics -- to speed up the discovery and development of new drugs. Its orphan drugs Kalydeco and Orkambi, and its latest combo drug Trikafta are some of the few used to treat cystic fibrosis, a debilitating disease that shortens the life spans and affects the lifestyles of scores of people worldwide. The firm is also seeking approval for the medications for other indications. Vertex has other drugs in development, including additional treatments for cystic fibrosis as well as cancer, pain, and the flu.
Medtronic is the largest and most diverse medical device company in the world with a market
capitalisation north of US$130 billion. Annual revenues are expected to surpass US$30 billion in FY 2019 and it has a presence in more than 155 countries globally. Medtronic is one of the true
pioneers in the cardiac device space having invented the electronic pacemaker in 1957 and
producing an implantable pacemaker in 1960. Since then it has expanded into all aspects of cardiac treatments - bradycardia pacing, tachyarrhythmia management, atrial fibrillation management, heart failure management, heart valve replacement as well as malignant and non-malignant pain, movement disorders as well as insulin delivery systems.
If you would like more information on Macrovue's International Share portfolios please contact us on 1300 720 292.