For the past five years, the health-care sector has been charging ahead in a bull market. “The pie has gotten bigger from people aging,” says Andrew Waight, who manages CI Global Health Sciences. An aging population consumes more health-care drugs, products and services. Waight notes that in the United States alone, there are about 78 million aging baby boomers. As well, demand for health care is fairly recession-resistant. People require medical treatment regardless of the state of the economy.
“From the big-picture point of view (for health care), it’s those big drivers, demographics, consumers and lots of new technology and information,” says Waight, principal of Stanford, Conn.-based Altrinsic Global Advisors.
Based in Toronto, Waight has been the sole portfolio manager of CI Global Health Sciences since 1999. Before joining the investment industry in 1993, he managed three medical clinics in Toronto. He holds an honours bachelor of science degree in genetics, a master’s degree in biochemistry and an MBA, all from the University of Western Ontario.
It isn’t only the U.S., the world’s biggest consumer of health care, that is driving this sector, Waight notes. Other countries are also ramping up their health-care spending, including developing countries.
China is a prime example. At the same time as the world’s most populous country has grown, the percentage of GDP spent on health care has been rising. “So you’ve seen a massive influx of investments in hospitals, etc.,” says Waight.
He adds that China has rolled out health-care insurance that now covers 95% of the population. “Then on top of that, you’ve seen an explosion in the middle class in China, so they’ve become increased consumers of health care.”
Another major driver of the health-care sector is what Waight refers to as the “renaissance” in biotechnology stocks. When the components of the human genome were first mapped or “sequenced” 15 years ago, there was elation over all the new drugs that would result. That never materialized, Waight says, because of the lengthy process of translating that research into medicine and drugs. “Guess what?” he says. “We’re now seeing a biological explosion in terms of the information coming out.”
New technology has led to the development of more medical applications, says Waight. An example is in the area of oncology and the way leading-edge hospitals in the U.S. treat cancer today.
A number of years ago, says Waight, if an individual had a suspicious-looking mole on their skin, a biopsy would be sent to a laboratory to determine whether the mole was benign or cancerous. Today, the biopsy is sent to a sequencing lab and the report will list what is driving the growth of that tumour.
Waight says there are now drugs — “personalized medicine” — that are geared specifically for particular mutations. “We’re now getting better at designing drugs that are more targeted, with fewer side effects.” In the case of melanoma, 50% have a particular mutation, and there are two drugs on the market that treat it.
In CI Global Health Sciences, Waight has a hefty 65% weighting in U.S.-based companies. The U.S. is “a private health-care system, so it attracts companies,” he says.
Secondly, the depth of the U.S. market attracts venture capitalists who are willing to lend to health-care companies. Thirdly, there are strong partnerships between academia and business. “That’s why you see hotbeds of research at Cambridge University, Massachusetts Institute of Technology (MIT), Harvard and in California,” says Waight. So there’s lots of strengths in the U.S. market.”
Federal changes in the U.S., with the passing of the Affordable Care Act requiring everyone to have health insurance and offering subsidies for those who can’t afford it, has also had a positive impact. “If you’re looking at pharmaceutical and medical device companies,” says Waight, “all of a sudden you’ve got another 10 million customers who are getting their health care paid for, so they’re going to start consuming.”
In terms of challenges in the health-care sector, “pricing is the big one,” says Waight. A lot of the new drugs are very expensive, such as the melanoma drug. As well, he says valuations in the big pharmaceutical companies are considered fair to overvalued in most cases. According to Waight, the high valuations have been driven by the successes in the product pipeline, and because Big Pharma companies are regarded as safe havens in a volatile world. The dividends also look attractive in a low-interest-rate environment, he adds.
Looking ahead, “even though the valuations of a lot of biotech stocks and some of the pharma look stretched,” says Waight, ” it’s a diverse sector. Science does not stand still. There are always new companies coming through that have interesting intellectual properties.”