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This is the second part of a series with Ketan Patel, manager of the Amity UK Fund, exploring investing opportunities in the Healthcare sector. The Healthcare industry is often viewed as homogenous by many investors, but the depth and breadth offered at a sector level is second to none. The diverse global industry includes well-established global companies providing rich opportunities for long-term investors.

Healthcare: a quality value chain for investors

Ketan Patel Ketan Patel Fund Manager
Opinion

Healthcare: a quality value chain for investors

Ketan Patel

Ketan Patel
Fund Manager

This is the second part of a series exploring investing opportunities in Healthcare by focusing on the value chain. The Healthcare industry is often viewed as homogenous by many investors, but the depth and breadth offered at a sector level is second to none. The diverse global industry includes well-established global companies operating in the research & development of drugs, biotechnology, diagnostics, distribution, medical technology and animal health, all of which provide rich opportunities for long-term investors.

Industry tailwinds: economics and demography

Healthcare remains a core part of the economic budget of most countries and the US leads by spending 20% of its GDP on this segment alone. The level of GDP and spending on healthcare is positively correlated. The emergence of a middle class in emerging markets is a tailwind for the industry with more patients being able to afford and access healthcare. In addition, as these economies become developed, the changes in consumer and dietary habits will lead to an increase in chronic diseases and conditions that are particularly prevalent in developed nations: diabetes and cardiovascular. A growing global population, which is both aging and ailing remain highly supportive long-term trends for the industry.

Value chain: quality and diversified

At a sector level, the quality and diversification offered by the healthcare industry is a stand out for all types of investor - quality, defensive and growth. The large cap pharma R&D names like GlaxoSmithKline, Sanofi, Roche, Novartis, Merck Inc., Pfizer and Abbvie have defensive business models with low leverage, high margins, strong cash flow generation and sustainable income. It has been no surprise that this sector has stood up well during the pandemic. In addition, there hasn’t been a dividend cut in this part of the market for over 20 years, excluding M&A. This remains a big draw at a time when the global dividend landscape has been fractured by cuts, suspensions, cancellations and deferrals.

There are also growth opportunities in the large cap space with the likes of AstraZenca and Novo Nordisk offering highly attractive earnings growth for investors. Novo Nordisk, the leading global manufacturer of insulin, operates in a therapeutic market that is projected to nearly double to $60bn by 2025. Within Animal Health, a sector that is forecast to grow by a third by 2024 to $44bn, market leading companies like Zoetis, Elanco and Dechra Pharmaceuticals are forecast to grow their earnings in double-digits. Another growth sector is biotech, where companies like Amgen, Gilead and Biogen are transitioning into biopharma giants.

Healthcare remains a core part of the economic budget of most countries and the US leads by spending 20% of its GDP on this segment alone. 

The Medical Technology sector has well established companies like Smith & Nephew, Boston Scientific, Johnson & Johnson and Medtronic to name a few that have built high quality businesses capable of delivering long-term compounding earnings growth. The pandemic has brought the Diagnostics sector to the forefront and high quality names in this space include Bioventix, Abbott Laboratories and Beckton Dickinson. The quality and diversity on offer in the Healthcare industry remains compelling and the increased adoption of technology augurs well for the investors of all types.

Healthy outlook

The length and impact of the pandemic will be difficult to predict, but long-term investors who are willing to search out companies with high quality business models operating in strong end markets coupled with high barriers to entry will be well rewarded. The diversification offered by healthcare companies is underpinned by long-term demographic and economic tailwinds. Although there is much to be concerned about on the economic and political front, the healthcare industry remains well positioned to offer quality, growth and diversification for long-term investors. The industry is entering an exciting phase with the increased adoption of technology which will act as a disruptor leading to greater innovation and this will be examined in the last instalment of this series.