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20. Uncovering Trusts – Healthcare-focused trusts: A sector on the mend
51 Plays19 days ago
In this episode, our healthcare analyst, Jyoti Prakash, CFA, and director of content, investment trusts Milosz Papst discuss Edison’s latest thematic research note on healthcare-focused investment companies as a way of gaining exposure to the sector while managing the downside risk. Following a turbulent period in recent years, the healthcare sector (and in particular small and mid-cap biotech companies) are now primed for a turnaround. The sector remains fundamentally strong, and the downturn after 2021 led to rightsizing and more realistic valuations (which potentially offer an attractive entry point). This is coupled with continued high level of innovation, a looming patent cliff for big pharma, an uptick in IPO and M&A activity, as well as technology-driven advancements. All this creates fertile ground for a re-rating of the sector on the back of the recent reversal in the interest rate cycle, as well as the conclusion of the US presidential elections.
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About ‘Uncovering Trusts’
'Uncovering Trusts': is a podcast run by Edison analysts released every two weeks. Subscribe to hear analyst interviews on how investment trusts maximise returns while managing risks for investors.
About Edison:
Edison is a content-led IR business. We believe quality investment content should inform all investors, not just brokers. Our mission: engage and build bigger, better-informed investor audiences for our clients.
Edison covers 50+ investment trusts, read about them here: https://www.edisongroup.com/equities/investment-companies/
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Transcript
Introduction to Uncovering Trusts
00:00:05
Speaker
Welcome to Uncovering Trusts, a podcast by the Edison Group, a content-led IR business integrating analyst content, digital targeting, and investor engagement. Each episode will uncover the distinct features and latest developments of a selected listed investment company. So tune in to find interesting investment ideas and stay on top of what's happening in the investment company sector.
00:00:28
Speaker
I'm your host, Will Manuel, and today I'm joined by Milosh Pabst, Director of Investment Company Content, and Jyoti Prakash, Healthcare Analyst at the Edison Group.
Edison's Healthcare Report Overview
00:00:37
Speaker
We'll talk about Edison's recent thematic report on healthcare-focused investment trusts. Jyoti, Milosh, thanks for joining us today. Thanks for having me. Thanks for having us. Lovely to have you here. So, Milosh, why have you decided to look into the healthcare care theme now?
00:00:53
Speaker
Well, we believe that following a turbulent period in recent years, um the healthcare care sector and in particular small and mid cap biotech companies are now primed for a turnaround. The sector remains fundamentally strong and the downturn after 2021 led to right sizing and more realistic valuations, ah which potentially offer an attractive entry entry point.
Opportunities in Healthcare Investments
00:01:17
Speaker
This is coupled with continued high level of innovation, a looming patent cliff for Big Pharma, um an uptick in IPO and M&A activity, as well as technology driven advancements. um All this creates fertile ground for a re-rating of the sector on the back of the recent reversal in the interest rate cycle, um as well as the conclusion of the US presidential elections.
00:01:40
Speaker
and In this context, we discussed in our thematic piece the role and positioning of specialist healthcare care investment companies as a way of gaining exposure to the sector while managing the downside risk. Right, so can we take a step back and before we delve into the current market environment, can you just recap what happened in the biotech and healthcare care sector since the outbreak of the COVID-19 pandemic? um Sure, I agree it is helpful to briefly discuss the events leading up to this point.
00:02:09
Speaker
While the COVID-19 pandemic initially brought activity across several sectors to a standstill, healthcare was the contrarian with both sector-focused investors and generalists shifting attention to the space driven by the positive sentiment to us but towards the sector's curative efforts. This trend in particular was led by Biotech, assisted by the successful development of mRNA vaccines for COVID-19.
00:02:37
Speaker
The biotech bull run was further driven by the monetary easing and fiscal stimulus at that time. As a result, the S and&P biotech index rose over 250% between March 2020 and February 2021, driving valuations to what many believe were untenable levels, peaking in February 2021 at the height of the pandemic.
00:03:00
Speaker
As expected, there was a corresponding surge in IPO and M&A activity across the sector.
Biotech Market Dynamics
00:03:07
Speaker
Right, thank you. But then the market turned off after the first half of 2021, right? Yes, exactly. um As interest rates rose sharply to curve inflation, the evaluations of high-risk, long-duration assets, such as biotech companies, especially emerging biotech, were subject to a sharp correction with the S and&P biotech index down by more than 65% against the broader S&P 500 between February 2021 and November 2023.
00:03:36
Speaker
We also saw a wave of bankruptcies and restructuring and the visible decline in funding in the private markets. The impact of this capital grant was particularly severe for capital intensive development stage biotechs. This is illustrated by the strong fall of the SPDR S&P biotech ETF index, which is a proxy for small cut biotech performance given its equal weight composition compared with the capitalization weight NASDAQ biotech index.
00:04:03
Speaker
Okay, thanks. and So I understand that despite this significant derating, fundamentals across the sector are strong. Can you shed some light on the current level of innovation across the industry?
00:04:15
Speaker
Of course, the high level of innovation is evident in the record number of FDA approvals, 67 in 2023, with 36% of the approved chemical-based drugs being described as first-in-class, that is drugs with mechanisms of action differing from those already available on the market. In 2024 to date, the FDA has approved around 50 new drugs, including 13 biologics.
00:04:41
Speaker
Some of the notable drug approvals have been ah CAR XT for schizophrenia, developed by Caruna Therapeutics, which was acquired by Bristol-Myers Squibb in late 2023 for $14 billion, dollars as well as Eli Lilly's drug Donanabap for Alzheimer's disease and Acceliron Pharma's drug for pulmonary arterial hypertension.
00:05:04
Speaker
I would also note that two of these three drug approvals I've just highlighted were developed by smaller biotechs before they were acquired by Big Pharma. And according to vital transformation, healthcare research consultancy, 55% of the drugs approved by the FDA between 2011 and 2020 in the US were developed by smaller biotechs. Right, that's very interesting. So I understand that the strong innovation among emerging biotechs should encourage big pharma to ramp up M&A and licensing deals.
Big Pharma's Strategic Moves
00:05:37
Speaker
Correct, but but it's not only the level of innovation, but also the upcoming patent cliff and corresponding sales at risk um that many big pharma companies are facing or have recently faced for their blockbuster drugs. In our thematic piece, we focused on 12 major drugs for which we see sales at risk of around $150 billion, dollars um with some estimates we've seen for a wider selection of drugs at more than $200 billion. dollars um Here I would note that patent cliffs form part of natural cycles in the healthcare sector every 10 to 15 years. And the last notable set of patent cliffs was around 2010. Now the majority of the selected 12 drugs we looked at are biologics rather than small molecule drugs.
00:06:20
Speaker
The latter typically face steeper patent cliffs due to the ease with which manufacturers can synthesize generic products, whereas some biologics come up against biosimilars, which are more challenging to manufacture and hence are not as straightforward to substitute from a prescribing perspective.
00:06:37
Speaker
ah Moreover, ah particularly in the US, biosimilar entry tends to be challenged with patent litigations from the original drug manufacturers, with Humira being a good example. Still, we believe that this will be a challenging period for big pharma companies to navigate, and revenues will need to be replenished to offset the patent cliffs, driving M&A and licensing deals across the sector.
00:07:01
Speaker
Right, that's helpful. um So how do the healthcare-focused investment companies fit into this theme? Well, the the biotech sector's scope, idiosyncrasies and technical complexities ah make successful stock picking difficult for general investors. um This is particularly important given the binary outcome of investment cases for many individual biotech companies, might for instance do their clinical trial results.
00:07:27
Speaker
ah We believe that healthcare-focused investment companies with their broad portfolios, varied exposure, and experienced managers and analyst teams ah with strong finance and science backgrounds offer an appealing alternative to direct investment in individual biotechs for both specialist and generalist investors.
00:07:44
Speaker
um Importantly, the healthcare sector is vast and encompasses broad sub-sectors such as pharmaceuticals, biotech, and medtech, each of which is further broken down into various focus areas at different stages of development. Now, while the cash rate commercial stage larger pharma space typically appeals to value investors seeking capital appreciation and a steady income stream in the form of dividends, biotech investing normally offers more upside potential in exchange for more risk.
00:08:13
Speaker
our Healthcare focused investment companies typically have specific investment policies based on how their portfolios are tailored, um ranging from more diversified place to those focused solely on emerging biotech, which provides a platform for all risk appetites.
00:08:28
Speaker
In our our research note, we provide an overview of 12 such investment companies, including their investment remit, portfolio diversification, historical performance, as well as shareholder return policies. and All these investment companies threatened traded discounts wider than their historical average. Perfect. Thank you, Milosz. Before we conclude, can you maybe tell us about the most promising therapeutic areas of presence?
Emerging Therapeutic Areas
00:08:52
Speaker
Sure, um I would first highlight Oncology which remains the largest segment in the pharma market with a 26% market share according to Evaluate Pharma. It is also the fastest growing segment with sales projected to increase by around $640 billion dollars between 2021 to 2028.
00:09:13
Speaker
i was I would also highlight an emerging area of innovative new technologies that aim to improve on the more traditional chemotherapy approaches and create ah more beneficial outcomes for patients. These include but are not limited to antibody drug conjugates by specifics, cancer vaccines, and radiopharmaceutical drugs.
00:09:36
Speaker
ah Neurological conditions is also an expanding space within healthcare, with recent headlines covering various components of the segments, most most notably Alzheimer's disease. As I've already mentioned, Eli Lilly's drug ah was approved by the FDA in July 2024, joining Biogen's Lekimbi in a new wave of treatments for the condition.
00:09:59
Speaker
Now moving from neurodegenerative conditions to neuropsychiatry, ah September 2024 saw the FDA approval of Corona Therapeutics, CAR XT. The drug has a novel mechanism of action for schizophrenia, reviving what has been a relatively stagnant field since the 1950s.
00:10:19
Speaker
With neurology being a complicated segment of drug drug discovery with high levels of complexity, we view it as a landscape ripe for clinical innovation reflected in the rate of involve advancement advancements in the last year alone.
00:10:35
Speaker
Finally, we cannot forget about obesity, headlined by the impressive performances of Novo Nordisk and Eli Lilly, underpinned by revenues from the new GLP-1 agonist treatments that have rapidly become well-known names. We go B and ZEP bound in particular. Obesity is highly lucrative with the total market size projected to reach around $130 billion dollars by 2028.
00:11:01
Speaker
While the current landscape is dominated by the two big pharma players, there is ample opportunity for innovation in the space. There are over 100 candidates in clinical transphobicity and while the most advanced programs are based on GLP-1 agonist, the focus areas for innovation also include associated targets such as improving effectiveness of the drugs, minimizing side effects such as nausea, vomiting, and loss of muscle mass which is seen with the currently approved GLP-1s.
00:11:34
Speaker
optimizing dosing and administration regimes, as well as addressing the conditions associated with obesity, in particular cardiovascular and renal conditions.
Innovations in Healthcare Technology
00:11:46
Speaker
That's interesting. And finally, can you shed some light on the technological advancements in the sector?
00:11:52
Speaker
Yes, with pleasure. um An important advancement has been the significant decline in the cost of genome sequencing, um a combination of cheap genetic information and the foundation of new modalities, that is therapeutic techniques, to address disease should be a powerful combination.
00:12:09
Speaker
I also think that AI and machine learning cannot be ignored in transforming the healthcare sector and have the potential to offer many benefits which may be utilized across the entire healthcare landscape from earlier stage drug development, such as accelerated target identification efforts through to practicing medicine. Great. So thank you very much, both of you. You've been listening to Uncovering Trusts, a podcast by the Edison Group. I'd encourage you to explore our recent thematic healthcare piece.
00:12:37
Speaker
we've been discussing to learn more about the sector and the 12 health care trusts that we highlight. So for that and other content on the sector please visit www.edisongroup.com