In a period of market volatility, the instinct of an investor is to seek a ‘safe haven’ for their investments and, while healthcare is not always seen as a stable source of investment income, subsectors of the industry are.
For example large pharmaceutical companies, such as GlaxoSmithKline and AstraZeneca, are often seen as a key defensive play in the equity market as they have strong free cashflows and proven products, while the smaller biotechnology or niche firms perhaps fare less well.
In terms of market performance the MSCI AC World Pharmaceuticals index has outperformed the MSCI World over a five year period to November 14, with a total return of 65.6 per cent compared with 17.3 per cent from the MSCI World. However the MSCI AC World Biotechnology index outperformed them both over the same period with a price return of 109.5 per cent.
Gemma Game, manager of the £270.3m Axa Framlington Health fund, explains: “Mega cap pharmaceutical companies haven’t really grown that fast but they are generating huge amounts of cashflow and they’re returning that cashflow to shareholders. So they’ve performed very well during the financial crisis because shareholders have liked the stability of those cashflows.”
In comparison she notes that biotech is a very disparate industry, with the large-cap end of the spectrum growing its revenues, growing its earnings and becoming more cash flow generative.
Ms Game notes: “That has performed very well during the crisis as well as it is seen as a safe haven growth vehicle. But the small-cap end of the biotech spectrum has been a little bit more mixed.
“The very microcap companies who have weak balance sheets have found it more challenging; they’ve performed less defensively than the larger-cap companies. With the small-cap companies it is much more stock specific related to the event they’re exposed to.”
However, large cap pharma companies have their own problems with many facing expiring drug patents.
Hilary Natoff, manager of the $387m (£312m) Fidelity Funds Health Care fund, notes: “Pharmaceutical companies tend to be larger, more developed, commercialised organisations and will have a portfolio of revenue generating products, the key risk in this sub-sector is patent expiry, with many large cap companies having so-called “patent cliffs” which means that generic, more affordable versions of their products could erode market share unless the pipelines are coming in to replace them.
“Many larger players in the industry have tried to resolve this issue through mergers and acquisitions, although I remain underweight large cap pharmaceutical companies as some have not addressed their patent cliffs. I see better opportunities in mid and small sized companies.”
Biotech shake-out
