A wave of blockbuster, life-saving drugs and takeover bids will revive healthcare and biotech stocks and protect them from attack over high drug prices, says Sven Borho of Orbimed Advisors, a leading investor in the sector.
Shares in drugs companies tumbled following a pledge to tackle pharmaceutical ‘price gouging’ made by Hilary Clinton, the former US foreign secretary seeking to lead the Democrat party in next year’s presidential election.
US biotech shares plunged 20% and healthcare stocks by 10% in an eight-day period in September when the media furore over drug price hikes was at its height.
Although share prices have since recovered some ground, concerns over the commercial practices of Valeant Pharmaceuticals have ensured the debate over healthcare costs has remained high up the US political agenda.
Fact and fiction
Borho, co-manager of the Worldwide Healthcare (WWH) investment trust, questioned if the issue had got too much attention. Speaking to investors in London yesterday Borho pointed to figures from the Centers for Medicare and Medicaid Services (CMS) that showed US spending on most prescription drugs rose by 2.7% a year on average in 2007-13, he asked: ‘Is 2.7% growth a massive problem?’
While CMS forecasts showed prescription drug expenditure rising ahead of overall healthcare spending and growth in the US economy by 2023, the difference was small: 5.9% versus 5.7% growth in spending and 4.6% in GDP.
‘What’s the reality? Are healthcare costs spiralling out of control?’ Borho asked.
He also questioned whether Clinton – or her left-wing rival Bernie Saunders – could succeed in regulating drug prices. Clinton had tried and failed at reform in 1994 when her husband Bill was president and the Democrats had control over both parts of Congress, he said.
In 2010, despite having Democrat majorities in both the House of Representatives and the Senate, president Obama had not pushed through price restrictions as part of his health care reforms.
Borho said even if Clinton became president, she would probably face a Republican House and a divided Senate. A split Congress would not enact anything he said.
‘The chances that everything will change if Hilary Clinton is elected are extremely remote,’ he said.
New York-based Orbimed is the world’s biggest specialist investor in healthcare with $15 billion under management. In the UK it is best known for the Worldwide Healthcare fund, which Borho runs with Sam Isaly, the firm’s managing partner, and the Biotechnology Growth (BIOG) investment trust, run by Geoff Hsu and Richard Klemm.
Central to Orbimed’s confidence in healthcare prospects is what its team sees is the continuing trend for scientific innovation, drug development and corporate activity with companies with valuable assets bought by larger rivals.
Although the drugs industry will remain vulnerable to criticism of over charging, ultimately the fund managers believe drugs companies will be able to levy high prices for successful treatments.
Orbimed remains excited by developments in immuno-oncology where a new generation of drugs teaches the body to fight the cells responsible for a wide range of cancers.
Borho gave the example of Opdivo, a treatment for advanced melanoma, or skin cancer, developed by Bristol-Myers Squibb of the US and Ono Pharmaceuticals of Japan.
Approved for sale in the past year in Japan and the US, Opdivo was fast-tracked in the UK this summer for use against lung cancer. It was evident in Bristol-Myers’ recent third quarter results, helping the world’s 15th biggest drugs company by revenue beat analysts’ earnings forecasts.
That’s because Opdivo is expensive. According to the company, the first year of treatment using the drug in combination with others is around $256,000, falling to $150,000 a year if Opdivo is taken on its own.
But it is also successful, said Borho, who predicted that Opdivo could eventually generate $8-10 billion in annual sales as it became ‘the cornerstone of cancer therapy’.
‘This will touch each one of us as it will transform, when we come down with cancer, the treatments available to us,’ the manager said.
He predicted immuno-oncology treatments could turn over $30 billion in sales in the next four years. Ultimately, he believed they would be seen as value for money. ‘These therapies are going to save your life, not just simply extend it a few years,’ said Borho.
As part of their portfolios both WWH and BIOG invest in up to 14 ‘emerging’ biotech companies who will finish final phase three tests on a range of conditions such as breast cancer, epilepsy and Parkinson’s disease in the next year. Successful trials could transform the prospects of these companies, he said.
Borho argued that Wall Street had consistently under estimated the growth potential of biotechnology. ‘Even at the current low P/E [price to earnings ratio], the "E" is wrong. On average the biotechs demonstrate better growth than the Street expects.'
Although biotech shares have soared in the past decade, Borho denied the sector was in a ‘bubble’ as shares prices had been driven by sales growth and fundamental business trends and not simply by expanding the multiple applied to earnings when valuing companies.
He said shares in big biotechs like Gilead, Amgen, Celgene and Biogen traded on less than 15 times forecast earnings for next year, on average. This was less than the average for the US stock market despite a record of superior growth in the past three years.
Meanwhile, corporate activity would continue to be a big theme as firms looked to buy growth and consolidate their positions. Borho said November was set to be a 'hot' month with Allergen, Gilead and Johnson & Johnson all reported to be linked to deals.
Despite the travails of the share prices, last month saw healthcare services vie with financials as the US’s fastest growing sector, according to data from Markit. Its purchasing managers index (PMI) gave healthcare a score of just over 54, with 50 separating growth from contraction. Growth in pharmaceuticals and biotechnology had weakened, however, according to this snapshot of activity.
WWH invests nearly 19% of its £902 million of assets in big biotechs with another 14% in higher risk emerging biotech companies. The rest of the fund is divided between conventional pharmaceuticals, specialist firms and medical technology providers. Most of the portfolio is in US companies although 13% is held in emerging markets. By contrast BIOG invests over half its £442 assets in big biotech with a further 39% in emerging biotech.
BIOG is the strongest performer with a 340% total shareholder return over just five years compared to 190% from WWH. However, its three-year annualised return of 36.8% growth in net asset value has fallen behind the 37.3% from the Nasdaq Biotech index, something which Borho said its managers were determined to correct.
Over five years, figures from the company show an annualised return of 33.2% up to the end of October, above the 30.7% from the Nasdaq benchmark.
Both trusts often trade at small discounts below NAV. The discounts widened slightly in September but have since narrowed to around 4%.