Healthcare and biotech stocks offer investors the ‘deal of a lifetime’ as the sectors continue to hit by brickbats in the run up to the US presidential election.
That's the claim of Sven Borho, head of the OrbiMed equity team that runs the Biotech Growth (BION) and Worldwide Healthcare (WWH) investment trusts, which specialise in the sector and have had a tough time in the past year as the sector has become a political football in the race to the White House.
Pledges by Democrat candidate Hillary Clinton to tackle alleged 'price gouging' by drugs companies and her Republican rival Donald Trump's wish to repeal the current administration's flagship reform Obamacare have turned investors away from the sector.
Measured in dollars the Nasdaq Biotech index has fallen by 27% in the past year, although the slide in the pound against the US currency has shielded UK investors from the worst of this with the index down 9.5% in sterling terms.
Those concerns continue today with Bernie Saunders, Clinton's former rival for the Democrat nomination, unleashing another attack on the industry and alleging insulin price fixing by US and European companies.
Crackdowns and buy points
Borho said the negative news that started with pharma villain Martin Shrekli hiking drug prices 5000% over year ago had created buying opportunities.
The largest US healthcare stocks remained cheap, priced at an average of 13.9 times their earnings (P/E), or profits, he said, while large cap biotech stocks traded at 11.1 times their earnings. By contrast, the overall US stock market as measured by the S&P 500 index stood at a multiple of 16 times earnings.
‘Every time there is political intervention in healthcare, they are the best buying opportunities in history,’ he said. ‘Relative to history, these are the lowest P/E ratios we have ever seen in the large cap biotech sector.'
He added: 'They are the fastest growing companies being treated like they are going into bankruptcy...if you buy companies at 4-5x earnings when they are growing at 15%, that is the deal of an investor’s lifetime.’
Although polls are tight, Borho believed Clinton would win the presidency but, like Obama, would have to deal with a Republican Congress. He described that as ‘the Goldilocks scenario’ as it would mean Clinton would not be able to pursue her price fixing agenda. ‘There will be no outright drug price control as that means legislation changes,’ he said.
Worldwide Healthcare's share price indicates that investor sentiment may have stabilised. The shares stand around 6% below net asset value (NAV), which is the average discount over one year. In sterling terms the £950 million portfolio has grown by 7.6% in the past year, leaving shareholders with a total return of 7.2%. Both are below the MSCI World Healthcare index which has risen just over 12%, according to figures from Numis Securities.
The trust's longer-term performance is much better with five-year NAV growth of 191% driving a shareholder return of 208%, beating the index which has advanced 148%.
It's a similar story with Biotech Growth, although its shares are more volatile, reflecting a greater focus on companies engaged in the cutting edge of commercial developments around healthcare research. At yesterday's close the shares stood at a 5.8% discount below NAV. Over one year the £376 million portfolio has fallen 10.8%, although shareholders have done slightly better with a total loss of 9.5%. That's in line with the decline in the Nasdaq Biotech.
Over five years, however, the trust has beaten the index with stunning NAV growth of 256% and delivering a total return of 276% to shareholders. The Nasdaq Biotechnology is up 231% over the same period.
M&A on hold
Borho admitted it had been ‘a tough year’ for Biotech Growth but said with ‘very high long-term rates of return...you have had to stomach a period of volatility’.
Part of the problem, he said, was the big names in US healthcare and biotechnology ‘sitting on their hands’ and putting merger and acquisitions (M&A) on hold until after the election.
‘Big pharmaceutical companies have enormous flexibility - they have money burning a hole in their pocket and they want to put it to work,’ said Borho.
‘The [deals they are looking for are] £5 billion to £10 billion acquisitions where they buy a single product with multi-billion dollar potential. The only thing ignoring that is the market.’
Two stocks held in the Biotech Growth trust are ‘prime takeover companies’, said Borho, naming oncology treatment company Incyte (INCY.O) and BioMarin Pharmaceutical (BMRN.O) which develops enzyme replacement therapy.
One of the main areas of interest for OrbiMed is around Alzheimer’s treatments where there are ongoing trials.
‘The biggest upside surprise potential is around Alzheimer’s. It has always been a graveyard of drug development as it always fails,’ said Borho.
‘A large number of companies are going after a number of targets,' he said. 'The next 12 to 18 months will be very exciting in terms of Alzheimer’s because it will confirm if we are going down the right path, or it could be a complete bust.’
Borho added that the ‘upside is not priced in and the downside is almost discounted in the price’. If successful he believed it could generate a US market worth at least $160 billion.
Investment trust analysts generally back the long-term story in biotechnology and healthcare. In a note in September on International Biotechnology (IBT), Anthony Stern of Stifel put a 'positive' rating on both it and Biotech Growth, saying they looked undervalue and offered growth.