Demographic trends set to lead to boom in healthcare
INVESTORS have been profiting from a healthcare revolution sweeping the globe, which still has a long way to run.
Stephen Barber of Selftrade notes two global demographic changes set to increase demand for healthcare: “The ageing population and the growth of the middle classes in the emerging world, led by China and India.” Across the world, population pyramids are turning into rectangles, says Dan Mahoney, who co-manages the healthcare fund at Polar Capital.
Barber cites “a massive demographic shift in the newly wealthy corners of the world.” Peter Kirkman, fund manager of the JP Morgan Global Consumer Trends Fund explains: “Growth for the healthcare sector is shifting eastwards.” He points out: “Emerging markets are forecast to contribute 70 per cent of pharmaceutical growth in the next five years. Added to this, the Chinese government is committed to investing £125bn to support healthcare reform between 2009 and 2011. Governments in Russia and Brazil have made similar commitments.”
The Atlantis China Healthcare fund has been top of the tree over the last three years, profiting from buying into newly listed companies in China – 2010 saw $6.9bn of activity with 24 new healthcare IPOs. The fund started off holding the medical group Shandong Weigao, which remains a major constituent of their current portfolio. Roger Mortimer of Atlantis Investment Management says that although the US healthcare market dwarfs the Chinese market – $2 trillion versus $240bn – he expects 25 per cent compound annual growth rate (CAGR) over the coming years. Mortimer believes China trumps developed markets because its healthcare is high growth as well as defensive.
US companies still dominate in other leading funds. Wellington Management Global Health Care G, BGF World Healthscience A2 and JPM Global Healthcare A have 80.94, 97.61 and 98.90 per cent invested in the US. David Pinniger of the International Biotechnology Trust (IBT) explains that healthcare innovation is still based in centres of excellence in the developed world.
Healthcare companies face two key risks: failure and regulation. Pinniger notes that on the clinical development side, only 1 in 10 projects go to market and the product development is both slow and expensive. Although exciting biotechnologies are about to hit the market – for example, fighting prostate cancer and hepatitis C – he thinks picking winners is difficult. He says the diversification offered by a fund makes a lot of sense, noting that UK investors just in UK biotech would have lost money in recent years. Mahoney cautions that trends play out differently in different countries. Thus, the recent crisis in UK care homes, played out in Southern Cross, contrasts with the relative success of French and American care homes.
Government regulations could also throw a spanner in the works, especially in China where the government has ploughed in vast amounts of cash. However, as messy as government intervention can be, it won’t be able to dampen peoples’ aspiration to extend and improve the quality of their lives and the profitability of companies making it happen.