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Health care, re-invigorated
The health care industry's fight against the coronavirus should boost its long-term investment appeal.
Written by
Marc Booty, Senior Investment Manager
The global health care sector is pulling out all the stops in the fight against the coronavirus. Not only have pharmaceutical, life science and health care equipment companies deployed a range of advanced technologies, they have also shown a remarkable willingness to work together to battle their common enemy. This could re-invigorate the entire industry, and boost its long-term investment prospects.
Its first major success could come within 12 months, by which point there is likely to be a significant increase in range and availability of effective coronavirus treatments. That will vastly improve the global population’s ability to live with the disease. True, vaccine development will take a while longer.
Questions remain over the safety and durability of treatments, and it is also not yet clear whether vaccines will have to be tailored for different demographic groups (the elderly, children). Complicating matters further, the medical profession does not yet know how long antibodies will protect those who have already been infected.
But even without an early breakthrough on vaccines, huge progress is possible.
In the early days of HIV, for example, average life expectancy upon diagnosis was two years. Now, with the help of a daily tablet, people can expect to live a normal-length life.
What is most encouraging is the level of collaboration that we are seeing in what has historically been a disparate and opaque industry. Sanofi and GSK – two of the biggest vaccine manufacturers – are working on a joint venture, AstraZeneca is collaborating with Oxford University.
Through such partnerships, health care companies have the opportunity to speed up the development of treatments against coronavirus and to demonstrate that it is an industry that serves the common good. That would mark a major turnaround for a sector long plagued by scandals over excessive drug prices and poor safety disclosure.
Valuation gap
Price-to-earnings (PE) differential between European equity sectors
Source: Bloomberg. Data covering period 05.02.2001-04.05.2020.
It is clear that the pharmaceutical industry in particular needs to abandon the short-term profit maximising strategies it has pursued in prior periods in favour of a long-term, patient centric model. Such a shift would lead to more stable profit growth over the next decade.
That in turn could lead to valuation uplift for health care stocks. Despite their recent strong performance, European health care companies still trade at a 20 per cent discount to their counterparts in the food and beverage sector, in price-to-earnings terms (PE). If the industry is willing to learn from mistakes, to work with society and to switch its focus to sustainability of earnings rather than profit maximisation, we believe that gap can close over the coming years.
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