People need prophylaxis, diagnosis and therapy
The health system, which is considered crisis-resistant, has suffered particularly from the Corona pandemic. Now many postponed operations and doctor's visits are being made up for. In this interview, Maximilian Köhn, fund manager of DJE - Europa, looks at the opportunities now available in the sector and sheds light on its future prospects.
Healthcare has been increasingly in the spotlight since Corona. What should investors know about the longer-term prospects of this sector?
The pandemic shows us how important prophylaxis, diagnosis and therapy of diseases are. By "us" I don't just mean the individual, but society as a whole - and this is likely to have a significant economic impact. Sensitivity to health issues will increase, not only individually, but also with the state and the payers. The latter will focus more on it out of their own interest, as the population is getting older and thus more susceptible to illness. At the same time, many companies in the sector have a healthy balance sheet. But the healthcare industry is very diverse: from large pharmaceutical companies as dividend aristocrats to strongly growing medtech companies to highly innovative but not yet profitable biotech companies, everything is present.
Compared to biotech or medtech, the pharmaceutical sector has significantly lower growth rates. Is this fact already priced into the share valuations?
In principle, yes, but one should not lump all pharmaceutical companies together. There are certainly pharmaceutical stocks that are growing at double-digit rates. Their share valuations are comparable with companies from the life science or biotech sector. Moreover, there are some pharmaceutical companies that are even more innovative than some biotech companies. However, this is not necessarily immediately recognisable from the outside, as the focus is on already existing products and their relevance for sales and profits. At the latest when patent protection lapses, the question of the product pipeline then moves to the forefront of the investor's view - good who could form an opinion here in advance. A thorough analysis of the companies and regular discussions with the management are therefore advantageous.
In the Corona slump, many doctor's appointments and operations were postponed. Can the pharmaceutical sector now benefit from catch-up effects?
Many pharma stocks are still not at pre-Corona levels. But here, too, there are partly considerable country-specific differences depending on the course of the pandemic and vaccination. Especially companies with a focus on oncology continue to struggle with the pandemic consequences. A similar picture emerges for companies with a focus on hepatitis-C. Here, too, the recovery will take a little longer and will not come back abruptly. Nevertheless, we can assume that the entire industry will benefit from a special catch-up effect because the previous year was so heavily burdened by Corona, precisely because of the lockdowns and the missed and postponed hospital and doctor visits.
Can you tell us where there are opportunities in the health sector beyond the pandemic, which the capital market is now reassessing after the Corona euphoria?
The open-mindedness to research new or complementary therapy approaches against chronic diseases (malignant tumours, diabetes, obesity, Alzheimer's) and then to treat them will increase. Against this background, I can well imagine that the willingness to take risks with regard to approvals of diagnostic or therapeutic measures will also increase. For example, the Covid vaccines were developed in record time and approved with the necessary study evidence. This is despite the fact that a normal vaccine has so far often taken more than 10 years to obtain final approval. There are also risks, such as greater governmental dirigiste influence. This has been made clear by the ultimately anti-innovation discussion about patent protection. Nevertheless, the global pandemic shows how important innovative biotech companies or even diagnostics are. This should also be reflected in share prices.
What distinguishes healthcare from other industries from an investor's point of view? What are the advantages for investors?
Health and all related topics belong to human history like hardly any other area and will remain so. Prophylaxis and therapy of diseases will still be an important topic in 100 years, even if the diseases may be different. At the same time, the health sector - as mentioned at the beginning - deals with many different topics. Therefore, there are diverse investment opportunities for investors, also depending on their risk tolerance.
The "all-rounders" or the niche specialists - which business model creates more value for investors?
We always go for the innovator, who is usually also the market leader in the individual segments. This is true for all of them - be it oncology, diabetes or even hepatitis. The classic all-rounder hardly exists any more, because many companies have tried to specialise their portfolio in the past. The large healthcare conglomerates are an example of this. The trend in recent years has been away from a broad product range. Individual sub-sectors are already being spun off again or even sold. Since conglomerates are often valued at a high discount on the stock market, investors can profit from this development.
Which topics do you consider promising for the future?
I would highlight two topics: For the first time in almost two decades, a new drug against Alzheimer's has been approved in the USA. The market is very large and hardly served so far. The WHO estimates that more than 50 million people worldwide suffer from dementia. Alzheimer's is one of the most common dementias (about 65%). It remains to be seen whether, following this approval, other competitors will now come onto the market with preparations.
The issue of overweight (obesity) is also widespread. More than 650 million people worldwide suffer from it. Hardly anyone has dedicated themselves to this market yet, and only 2% of all overweight people are treated with medication. There are currently hardly any approved products, and at the same time the market is dominated by self-payers. For pharmaceutical companies, this scenario is extremely lucrative. The WHO has recently classified obesity as a chronic disease. If one considers that obesity can trigger concomitant and secondary diseases, such as high blood pressure, diabetes or heart attacks, which cause considerable costs, the payers might also rethink in terms of reimbursement. So-called bariatric weight-loss surgery, for example stomach reduction, is already covered by health insurers, but anti-obesity drugs are not. Wouldn't it be plausible to also reimburse the corresponding drugs, for which only a fraction of the surgery costs are incurred?
To what extent is the increase in prosperity in developing and emerging countries also causing an increase in demand for medical products and services worldwide?
With increasing life expectancy and growing prosperity, the focus is changing. In the beginning it was about mere survival then about a better life and finally people strive for a healthy long life. This should open the door for innovative products from other countries as well. Developing countries and also emerging markets - especially China - are the growth drivers for many companies in the health sector.
Have acquisitions had their day as a remedy for weak growth?
A clear no. However, the trend is towards risky acquisitions in early stages of development. The last 2 years have seen large acquisitions, e.g. Bristol-Myers Squibb acquired Celgene in 2019 for over $87bn, Abbvie bought Allergan in 2020 for $83bn. And most recently, AstraZeneca completed its acquisition of Alexion for a purchase price of $40bn. But the trend towards smaller add-on deals is clear. While the volume of mergers and acquisitions in the pharma sector has declined noticeably over the last 10 years, the number of deals has risen sharply, as a look at the biotech sector shows: there are now considerably more acquisitions than 10 years ago. The motto here is: it is better to buy quickly and early, even with risk, but avoid large acquisitions.
How do you specifically go about selecting attractive stocks?
An important factor in our stock selection is personal contact with the company. This was much easier despite or even because of the Corona pandemic. A short virtual call with a company helps a lot to assess the current situation better than just reading the quarterly figures. In addition, a good network is helpful in this sector, e.g. direct information from a doctor about a new product.
Many global players are often based in the USA or Asia. Is Europe keeping pace with these sectors and megatrends?
That may be true, but the Corona pandemic has also impressively shown that Europe and also Germany can easily keep up with the USA. A good example of this are the mRNA companies from Germany or the diagnostics for Covid-19 (antigen / PCR tests) from the DACH region. But basically there are promising companies in many countries. We "just" have to find them. In the USA, however, innovation and the associated willingness to take risks are valued differently, i.e. more strongly, than in Europe. The valuations for US companies are therefore often higher.
Note: All information published is for your information only and does not constitute investment advice or other recommendation. Long-term experience and awards do not guarantee investment success. Securities are subject to market-related price fluctuations which may not be compensated for by the active management of the asset manager or investment advisor. This information cannot replace a consultation. All information has been provided with care and to the best of our knowledge at the time of preparation. Despite all due care, the data may have changed in the meantime. Further information on opportunities and risks can be found on the website www.dje.de. The sales prospectus and further information are available free of charge in German from DJE Investment S.A. or at www.dje.de The fund management company is DJE Investment S.A. DJE Kapital AG is the distribution agent. A summary of investors' rights can be obtained free of charge in German in electronic form on the website at www.dje.de/zusammenfassung-der-anlegerrechte. The funds described in this marketing document may have been notified for distribution in different EU Member States. Investors' attention is drawn to the fact that the relevant management company may decide to withdraw the arrangements it has made for the distribution of the units of its funds in accordance with Article 93a of Directive 2009/65/EC and Article 32a of Directive 2011/61/EU.