Medical science is entering an exciting phase, but investors need to evaluate each opportunity carefully, says Andy Acker, Portfolio Manager within the Global Life Sciences Team. Andy and his team have plenty of healthcare themes to pursue, many of which are already yielding results, not just for investors, but also for the health of people across the world.
In search of a panacea
The Global Life Sciences Team focuses on innovations, including solutions to tackle cardiovascular disease, cancer and diabetes. Heart disease, for example, causes 17.9 million deaths per year1 and cost the world US$863 billion to treat in 2010. That figure is estimated to rise 22% by 20302.
Rising wealth is generally regarded as a positive for the global population. But more disposable income typically leads to increased meat, processed food, and sugar consumption. As a result, the number of diabetes sufferers globally has quadrupled since 19803. The yearly bill for treating the world’s diabetics already tops US$800 billion4.
Global spend on cancer medicines continues to rise. Therapeutic and supportive care use was US$133 billion globally in 2017, up from US$96 billion in 20135. Meanwhile, the number of new cancer cases per year is expected to rise to 23.6 million by 20306. Life science is focused on improved detection of cancers and then ensuring that the disease is curable and no longer a killer.
Immuno-oncology medicines are a genuine revolution. They work by harnessing the immune system to target and attack cancer cells, often with impressive results. One recently approved immunotherapy, Keytruda, is reported to reduce the risk of death from the most common form of lung cancer by half.
Genetic disease is another area of interest to us. Scientists have identified over 7,000 such diseases, but fewer than 5% have available treatments. This means that there is considerable scope for finding cures to genetic diseases.
Since then, the development of new treatments has kept pace with our improved understanding of diseases. New treatments for haemophilia, sickle cell anaemia, and muscular dystrophy may not be far away. The US Food and Drug Administration (FDA) approved 59 new therapies in 2018 – an all-time record. But garnering approval is no easy feat.
Picking the winners
Before these drugs gain approval, they face significant development and testing costs with no guarantee of regulatory approval.
Drug development is binary and leads to extreme outcomes. The winners who gain approval stand to make millions of dollars for their backers and could improve millions of lives. The odds can be stacked against the innovators, however. Ninety percent of drugs that enter human clinical trials fail to reach the market. Even successful innovations do not always lead to the returns that investors expect. Some 90% of consensus estimates of a drug’s revenue potential miss the mark because actual revenues can under- or overshoot expectations within three years of each launch. As such, picking a stock with a life-enhancing product is a matter for strict valuation.
We are keenly focused on valuation, looking for stocks that trade below what we believe to be the scientific and commercial potential of a company’s products and pipeline. After the market’s pullback last year, the team believes that a number of biotech stocks, today, offer attractive valuations, potentially leading to a pickup in mergers and acquisitions.
On the fast track
In terms of getting a product out to market, global regulators are, today, finding themselves having to adapt to the rapid pace of change in the life sciences field. The European Medicines Agency is aiming to cut approval times by a third, while China now accepts foreign clinical data for its assessments of new treatments, potentially cutting approval times. The FDA is following suit and expects to approve as many as 20 gene and cell therapies per year7.
Prevention as important as cure
In key areas of health, technology is often just as important as medicine in ensuring patients stay healthy. Newspaper headlines often focus on new treatments, but we also keep a close eye on the medical devices market for new means to reduce the time it takes to detect diseases, or that significantly lowers cost, allowing more people access to treatment.
Investing in life
There are many reasons long-term investors might consider looking at global life sciences. Demographic trends are conducive, with the world population growing in size, age and wealth – hundreds of millions of people will require and have access to health services and medications as they live longer.
Structural change has also tended to benefit investors in healthcare stocks. Historically, the healthcare sector (MSCI World Health Care Index) has had a low correlation to the performance of the broader equity market (MSCI World Index) over the long term, an important distinction while we remain in a period of low global growth (source: Factset, 10 year period from September 2009 to September 2019).
Additionally, the sector has historically shown potentially defensive characteristics. For example, the MSCI World Health Care Index fell on average around one third less than the MSCI World Index in each downturn since the year 2000 (source: Factset, as at September 2019). Past performance is not a guide to future performance.
A long-term view
Indeed, the road to drug pricing reform in the US has taken some surprising turns this year. We believe that this reform, a key agenda of the US President, will continue to be vigorously pursued as the 2020 presidential election looms. New proposals could create more uncertainty. The Global Life Sciences Strategy's focus on companies delivering innovation and value to the healthcare system and those making the healthcare system more efficient – could become even more vital, as these firms look well positioned to take market share on the long and winding road to reform.
1 World Health Organisation, 17 May 2019 [https://www.who.int/news-room/fact-sheets/detail/cardiovascular-diseases-(cvds)].
2 The Global Economic Burden of Non-communicable Diseases, Harvard School of Public Health/World Economic Forum, September 2011.
3 World Health Organisation, 30 October 2018 [https://www.who.int/news-room/fact-sheets/detail/diabetes].
4 Worldwide trends in diabetes since 1980: a pooled analysis of 751 population-based studies with 4·4 million participants, NCD Risk Factor Collaboration, 6 April 2016 [https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(16)00618-8/fulltext#%20].
5 The IQVIA Institute for Human Data Science, Global Oncology Trends 2018, May 2018.
6 National Cancer Institute [https://www.cancer.gov/about-cancer/understanding/statistics] April 2018.
7 FDA as at 31 December 2018.
8 Food and Drug Administration, 15 January 2019 [https://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm629493.htm].
9 FactSet, as at 30 June 2019.