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Exclusive Investec takes the healthcare market’s pulse

The healthcare sector has seen some of the biggest advancements in the past two decades, driven by major breakthroughs across the biotech and genomics industries. Investec’s senior equity analyst Dr Jimmy Muchechetere reveals the investment themes fuelling change in the sector and provides an outlook for the market in the year ahead.

When it comes to advancements in healthcare, innovation has been a constant factor, Dr Jimmy Muchechetere, a senior equity research analyst at Investec, tells Opto.

He points out that the biggest drivers in the past two decades have been the Human Genome and Proteome Projects. Since then, the sector has seen major growth. Personalised medicine has taken a giant leap, which has furthered a lot of development in cancer therapeutics, while platform technologies like mRNA have gained traction after becoming widely used in Covid-19 vaccine development, for example.

However, investor sentiment has since slowed down from last year’s pandemic-induced run. The iShares Global Healthcare ETF’s [IXJ] 19.6% annual gain in 2021 has pulled back so far this year, with the fund down 5.6% at the close on 28 April. Weighing down enthusiasm are macroeconomic pressures stemming from the Russia-Ukraine conflict, including rising interest and inflation rates, which have culminated in heightened recession fears.

Because of soaring uncertainty, Muchechetere finds that many investors are looking to defensive sectors like the healthcare market to balance risk in portfolios. “Our research suggests that the kind of companies that we’re looking for will do very well in this period of uncertainty, whether it’s high inflation, high interest rates, war in Ukraine, Covid-19 or whatever else. The reason is because innovation is the key to be able to negotiate these headwinds,” he explains. 

“Our research suggests that the kind of companies that we’re looking for will do very well in this period of uncertainty, whether it’s high inflation, high interest rates, war in Ukraine, Covid-19 or whatever else. The reason is because innovation is the key to be able to negotiate these headwinds” - Jimmy Muchetere

Companies with a healthy pipeline of drugs or therapeutics, not just in the preclinical phase, but across all phases of clinical trials including at the final regulatory approval stage, are what Investec looks out for when finding stocks that have the best chance of negotiating a more uncertain market environment.

Healthcare tech trends

One of the biggest healthcare investment trends that Muchechetere has been following in his research is broad technological improvements across data analytics, telemedicine, remote monitoring and artificial intelligence (AI). He’s found that tech has increased the drug discovery process, reduced costs and time, and furthered the precision of efficiency.

“You get better defined druggable targets… and it improves the safety profile. An interesting stat I came across was GlaxoSmithKline [GSK], in one quarter in 2020, generated more data than it had in its previous 300-year history, and that's all thanks to a Nvidia [NVDA] powered supercomputer.”

While companies like GlaxoSmithKline and AstraZeneca [AZN] do offer some exposure to these major investment themes, Muchechetere explains that trends like gene editing are not a big part of generating revenue or value for these stocks.

“There are companies that are built around gene editing — Editas Medicine is one. But unfortunately, most of these are pre-profits and pre-cash flow. You’re really investing not so much with the return in mind, but how you can help the technology progress and then maybe have a future payoff many years from now,” he says.

Even in spite of the stock's recent collapse, to gain exposure to the telemedicine theme, Muchechetere says the best pure play stock is Teladoc Health [TDOC]. “The businesses itself is still doing pretty well [following its Covid-19 run up and subsequent drop off]. So far, the fundamentals remain strong. The number of lives covered, procedures, penetration rates, reusage rates, number of products per person — all that is rising.”

Within the remote monitoring trend, Muchechetere says that surgical robotics is an area that Investec is invested in and watching closely. The firm has exposure to Intuitive Surgical [ISRG], which he explains has been a key player in building the business for the past 50 years. “It’s very well placed, particularly when it comes to general surgical procedures, colorectal procedures, and urinary tract procedures.

“Surgical procedures are still at the foothills of what it can do. It’s something that is very low penetrated. The penetration rate now is something like 4% of all surgical procedures in the US and less than 1% globally.”

Next-generation healthcare opportunities

After training and working as a doctor for more than 10 years, Muchechetere’s medical background has meant that he’s been able to follow the nuances of these healthcare trends closely.

Indeed, the global healthcare market has never been more in the spotlight. Following the Covid-19 pandemic, which led to major advances in the fields of genomics and technology, the sector has flourished.

Looking ahead, Muchechetere sees regulation being a big factor in the healthcare market. He expects it to remain favourable based on last year’s Food and Drug Administration (FDA) leadership change. “Over the last few years, we have seen an improved trend in terms of FDA approved new molecular entities… which have increased every single year from 15 in late 2017 to 27 by 2021. That just shows you the strength of the innovation that this sector has.”

“Over the last few years, we have seen an improved trend in terms of FDA approved new molecular entities… which have increased every single year from 15 in late 2017 to 27 by 2021. That just shows you the strength of the innovation that this sector has” - Jimmy Muchetere

Mergers and acquisitions (M&A) is another area that Muchechetere expects to increase in the year ahead. “Generally speaking, the healthcare sector has a very strong balance sheet. Net debt to EBITA is generally less than historical times. There’s also a lot of innovation happening outside the big pharma, biotech universities, private labs, etc. In 2021, we had $270bn worth of deals happening across 370 transactions. PwC is predicting that for 2022 that’s going to rise to somewhere between $350bn to $400bn of deals. And this is all driven by strong balance sheets, moderate valuations, very healthy innovation and consolidation.

“Take all those things, valuation, strong balance sheet, [a favourable] regulatory environment, politics, M&A, and we’ve got a very positive outlook for healthcare.”

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