Managing your capital

Why not vaccinate your investment portfolio as well?

Luc Charlier

Luc Charlier


Take a closer look at what Europe’s healthcare prospects mean for your portfolio with our investment strategist Luc Charlier.

For anyone wondering whether Europe’s healthcare system was up to dealing with an epidemic, COVID-19 put it to the test. But while we managed to develop vaccines rapidly, that success doesn’t mask the enormous loss of life suffered and major problems still affecting our hospitals and economies. If Europe is to achieve health sovereignty, it’ll undoubtedly be necessary to imagine a thoughtful relocation of pharmaceutical production and investment in new production and innovation infrastructures. This means that the health sector remains, more than ever, worth looking at for long-term investment.

One of the major things the health crisis revealed is that many so-called developed countries need to address the chronic underinvestment in their hospital systems. They’ll have to start producing some "essential" medicines and medical products in their own countries.

When the pandemic began, the lack of surgical masks, gloves, hydroalcoholic gels, respirators, antibiotics, anaesthetics and many medicines used in resuscitation or cardiology affected nearly 85% of European hospitals. Europe, which has no shortage of powerful laboratories, was self-sufficient in this area in the 1980s. But today, 80% of our active ingredients are imported (think paracetamol or hydroxychloroquine, which come mainly from China) – up from 30% three decades ago. Our continent is also 40% dependent on importing 'finished' (prepared and packaged) medicines. Which come, for the most part, from India.

The problem with this dependence is that it makes Europe more vulnerable to supply disruptions. Back in 2019 before the crisis, France, for example, experienced 1,500 essential-medicine supply disruptions. It’s not surprising that in times of high demand, shortages are even more acute. And as this pandemic so sadly illustrates, supply disruptions result in a lower chance of survival for patients.

How is this possible when the global drug market is thriving? It amounted to nearly 980 billion euros in 2019 and is expected to reach 1.2 trillion euros in three years. And the main labs – US-based Johnson & Johnson, Pfizer, Merck, AbbVie, Bristol Myer Squibb and Lilly, Swiss Novartis and Roche, Sanofi in France and the UK’s GlaxoSmithKline – are all based in the West.

The answer is, in short, that all these companies are listed on the stock exchange.

Under market pressure, drug companies focus on delivering new products. They do this by buying or partnering with biotech companies, entering a new therapeutic area or segment (e.g. self-medication) or by acquiring sales or distribution capabilities.

Which, in this instance, supported the rapid development of the no less than 50 vaccines against COVID-19. Two of which are based on a gene technology - messenger RNA - never before tested on humans. How? Thanks to the partnerships between Moderna and Roche, as well as Pfizer and BioNTech.

But in their race for novelty, laboratories tend to neglect old drugs, or generics. Of course, their selling prices can be 60-80% lower than they were before their patents expired and they entered the public domain. These generics, which represent up to 80% of the volume of medicines consumed (which is the case in France) are then subcontracted and subject to numerous logistical and even qualitative uncertainties. Doing so has certainly helped to lower the average cost of medicines, but it’s also at the root of the fragility of our healthcare systems.

Increased spending in sight

Western states have been forced to resort to containment to respond to successive waves of COVID-19 because of the risk of putting too much pressure on hospitals, as well as the lack of tests, sequencing capacities, active principles and/or mature drugs. This situation calls for a structural overhaul of healthcare, particularly at the European level. On 11 November 2020, Ursula von der Leyen, President of the European Commission, called for a "Europe of Health" to ensure the health sovereignty of the Old Continent. How can we achieve it? Through a conscious relocation of pharmaceutical production along with investment in new production and innovation infrastructure.

Relocating all essential medicines obviously wouldn’t make sense. If only because not all the raw materials needed for their composition are available in Europe. Production chains are fragmented across different continents. But if they can’t repatriate everything, European executives could consider sharing part of the production chain among EU member countries. This should ensure that the healthcare sector remains attractive to investors, even if the new administration in the US, coupled with high unemployment, could put downward pressure on drug pricing and reimbursement.

Attractive relative valuation

In addition to the COVID-19 crisis, there are other factors that highlight the benefits of increasing healthcare spending, making it a long-term investment theme.

One naturally thinks of the fact that our life expectancy has increased considerably. In the space of two decades, we’ll have gained almost six years on average! In addition, the world population continues to grow – it’s expected to reach between 7.8 and 9.7 billion by 2050. And as everyone wants good health, healthcare spending is expected to rise from 8.8% to 10.2% of gross domestic product (GDP) by 2030 in Organisation for Economic Co-operation and Development (OECD) countries. This is out of line with the long-term (10-year) average growth of world GDP, which prior to the health crisis was 3.8%.

Of course, this prognosis is already partly integrated in the absolute valuation of the healthcare sector, which can no longer be described as cheap. It’s trading at almost 18 times expected earnings, which is close to its historical average (19.4). And its expected dividend yield is now only 1.7%, well below its historical average of 2.2%.

That said, it should be noted the healthcare sector’s relative valuation is still attractive - 10% cheaper than that of global equities.

Are you interested in investing in the healthcare sector?