The health of Healthcare investments

Investing in Healthcare is a challenge for even the most experienced professionals. Find out which factors to consider and our suggestions for doing it for the long term.

The Healthcare sector is made up of a wide range of companies that produce, distribute, sell and manage medical products and services. The huge scope makes it an unrivalled area of action: medicines, medical devices and insurance, as well as hospitals and healthcare providers. Regulatory difficulties, social exposure and historical resistance to change make it difficult for some investors to enter this world, even despite the incredible success of some companies during the pandemic. Find out what precautions you should take to invest in Healthcare.

Why invest in Healthcare

The onset of Covid-19 and growth of emerging players in the sector have led many investors to turn their attention to a sector that, until the pandemic, had defrauded investor expectations.

Even during the pandemic, the index tracking the sector, the Health Care Select Sector SPDR ETF (XLV), underperformed by comparison with the overall market. Despite the spectacular rise of a very limited set of companies to global stock market stardom as a result of the response to Covid-19, the reality is that the sector average delivered modest results for investors.

The explanation for this behaviour started many years before the pandemic. The last years were years of consolidation and the most fragile businesses were integrated, which reduced the potential for innovation. Companies that were unable to introduce new patents to replace those that expired saw their revenues decline and were brushed aside by generic manufacturers, and larger organisations with available capital have diversified their investments, making business models more complex and difficult to predict. Even the sudden pandemic-driven growth caught many investors by surprise – the price hike quickly closed the door on reasonably priced purchases.

In this context, is it worth investing in Healthcare? Within the Healthcare world, not all areas have the same growth forecasts, revenue stability, barriers to entry or challenges on the horizon. See the examples of where you can invest in Healthcare.

Where to invest

Some areas have come to a standstill. Others face severe regulatory barriers that slow growth and innovation. And sub-sectors that have lost revenue stability need to be purged. At Banco Carregosa, we regularly assess various sectors of activity, including the health sector. Below, you will find 5 areas of Health that you can analyse.

1.       Animal health

The sale of animal pharmaceuticals has all the virtues of conventional pharmaceutical products, such as high returns and predictable growth. Moreover, the potential for diversification is higher. The production of new patents, for example, is more predictable than in the human pharmaceutical industry, but the biggest advantage is that there is very limited exposure to patent expiry and generic drugs. And it seems likely it will remain that way.

2.       Diagnosis

These companies sell large equipment to perform various types of diagnostic tests. The equipment costs relatively little for clients (typically hospitals and laboratories), which means there is limited room to compete on price. Profitability comes from the consumables required for each test, which are usually supplied on long-term contracts and, as a result, is highly predictable. Given the importance of the installed base of equipment, market shares also tend to be fairly stable.

3.       Hospital supplies

Selling syringes and intravenous fluids may not sound like a good business, but the barriers to entry are very high. Product quality and reliability of supply are absolutely essential for hospitals and it is very difficult to build a good reputation for this. Without a strong reputation, persuading a hospital to accept a product is extremely challenging. In turn, this makes it almost impossible to achieve the scale required to compete on price.

 4.       Pharmaceutical industry

Some of the companies that sell pharmaceuticals also get a significant portion of their revenues from items such as animal health, agricultural science and diagnostics. Moreover, by having mature drug portfolios, even in the pharmaceutical business, it is possible to avoid the double risk of patent expiry and price reductions.

5.       Biotechnology

The ageing of the population, the increase in health expenditure per capita and the percentage of the world's GDP invested in research into new vaccines and drugs make biotechnology an area with great potential for growth. Some diseases in particular, such as cancer and cystic fibrosis, have the strongest prospects for development here. It is therefore an area to consider for investors looking to invest for the long term.

Development of per capita spending on medicines (USA)

 Fonte: Franklin Templeton 

How to invest in Healthcare?

Thematic funds offer exposure to several companies in the Healthcare area with high potential for profitability. As an example, we present below 3 investment funds monitored by our Investment Department.

Blackrock World Healthscience

The World Healthscience Fund, offered by the BlackRock management company, is designed for investors who seek exposure to the Health area. The Fund invests at least 70% of its more than 120 assets in companies whose main economic activity is healthcare, pharmaceutical, medical technology and clinical material companies, and biotechnology. 

Source: BlackRock

Find out more here.

Fidelity Global Healthcare

Launched in 2000, this fund has around 1,800 million under management and is invested in more than 40 companies. The manager invests in companies expected to benefit from long-term structural growth factors in the healthcare area, namely the ageing of the population and increasing healthcare needs. The investment policy is based on finding high quality companies (with, for example, high returns on invested capital - ROIC) that can generate compound growth over the long term. In particular, the manager looks for three key characteristics: quality, visibility and sustainability of the business. The manager focuses on healthcare companies in pharmaceuticals, biotechnology, medical devices and health insurance companies. These companies tend to be defensive in nature due to the relatively stable demand, even in times of volatility and uncertainty, for drugs and medical procedures.

Find out more here.

Schroder Healthcare Innovation 

Innovation in Healthcare is complex, fast moving and little understood by many. As a management company with a dedicated Healthcare investment team, Schroder is in a good position to take advantage of opportunities in this area. The Schroder Healthcare Innovation fund invests in innovative companies in the areas of robotics, related health services, gene therapy, telehealth, biosensors, precision medicines, among others.

 Find out more here.

 Conclusion: How to look after the health of investments

 The quality of products and business practices are critical when choosing investments in this sector. Issues such as device safety, price and environmental risks can quickly become reputational, operational and regulatory challenges for these companies.

 Therefore, the Investment Funds have developed an integrated ESG (environmental, social, governance) approach to identify organizations that have a keen sense of ethics, environmental responsibility, professional management, sustainable profitability and growth. It is something we all demand as members of society: that organisations operating in the Healthcare sector operate with a sense of social responsibility and use science and technology to meet the needs of the population.

For investors seeking exposure to the Healthcare sector, Banco Carregosa offers a diversified range of options such as Investment Funds and ETFs that invest in companies that are at the forefront of trends in the Healthcare business. Contact our team of experts.