Healthcare offers shelter from the recessionary storm if investors tread carefully
Innovative and best in class healthcare companies should continue to grow, but the sector is not without risk, writes Berenberg’s Matthias Born
As Europe slides into recession, safe havens such as healthcare are looking increasingly attractive for investors seeking to weather the storm.
The sector has a number of stocks still set to achieve secure quality growth, even in a recessionary environment. Those able to offer innovative products to take advantage of long-term structural tailwinds, including an ageing population, look particularly interesting. However, high costs of drug development and potential for slowdown of overall healthcare spending poses risks, so investors have to tread carefully.
Inelastic demand
The very best healthcare companies, from an investor perspective, are those that can power through different types of macroeconomic environment. Danish pharmaceutical giant Novo Nordisk is one of the best examples. Many Novo Nordisk products are paid for out of health insurance. This means demand is relatively inelastic, even during a recession. The firm has the capital to maintain consistent organic growth in the short-term, but also to invest in research and development of innovative products, positioning it for long-term success.
Novo Nordisk’s products are also buoyed by long-term structural trends such as the growing prevalence of diabetes and obesity in Europe and much of the developed world. Flagship products include its new anti-obesity drug, Wegovy. Obesity is a huge drain on the world’s healthcare resources, with OECD countries expected to allocate an average of 8.4 per cent of their total health expenditure to obesity-related costs from 2020 to 2050.
The statistics around cancer, with increasing incidences reported through advancing years, also make for stark reading. According to the American Cancer Society, one in three males and one in four females over 70 are likely to develop a form of cancer, compared to one in 16 males or females between 50 and 59. This bleak backdrop means companies that make a significant contribution to the fight against cancer are likely to see demand for their products grow.
Among firms cornering part of this expanding market is German medical device company Siemens Healthineers. In 2020, the business acquired leading radiography device manufacturer Varian Medical Systems for $16.4bn. While Swedish company Elekta is also seen as a key market player for these devices, Varian is the market leader, driving innovation over recent years.
Digital pioneers
Demand for virtual health services and the digitalisation of healthcare is also rising. Swiss dental implant manufacturer Straumann, in addition to providing high quality dental impact for tooth realignment, has branched into digital assets, selling a variety of products for dentists including an intraoral scanner that can make a 3D model of a patient’s mouth.
Investors, however, need to keep in mind two substantial risks. Firstly, we must question whether expenditure on health per capita is likely to stay constant over time. For example, the US spent nearly 20 per cent of GDP on healthcare in 2020, according to National Health Expenditure Data. Can the country really afford to maintain this? If not, while demand for new healthcare products might be there in theory, a form of rationing could start to take effect. This is why it is critical to only pick the best in the class when selecting healthcare stocks and focus on a firm’s culture of innovation.
Second, drugs are now very expensive to research and produce. On average, pharma companies spend $2.2bn for the development of a drug, according to Deloitte, with only 14 per cent of clinical trials leading to a product approved by regulators, as described in research published by Biostatistics in 2019. This presents a significant challenge for pharma companies, many of which are not good bets, but it does create opportunities for facilitator companies.
Swiss firm Lonza is one such facilitator, specialised in manufacturing ingredients and end-products for pharmaceutical and biotech customers. Lonza can save money for pharma companies looking to outsource and offers the type of specialist expertise to clients that many rival companies cannot.
Overall, the healthcare space reflects some significant long-term trends, which innovative companies are well-placed to tap into. The right healthcare stocks can provide secure and steady growth, even during downturns. But the sector is not without risk and traps do exist for the unwary.
Matthias Born is CIO and head of equities at Berenberg Wealth and Asset Management
