Life Science Sector
We believe that over the coming decade the life science sector, will be leading the most meaningful period of scientific discovery and advancement. This push forward is as a result of our improved understanding of the human biological system sparked by the discovery of DNA and our ability to decipher its code.
The three fundamental drivers that make the biopharma sector so compelling from an investment perspective are demographic shifts both in developed and emerging markets, the rising middle class of the emerging markets and scienfitic innovation.
As a result of dramatic increases in computer processing power over the past decade and mankind’s improved understanding of the human biological system, the biopharma sector is entering a new product cycle of therapeutic breakthroughs. While this progress may not be immediately apparent in our everyday lives, it is notable that many previously terminal diseases have become manageable/chronic with ongoing (often daily) treatment. Some of the most prominent examples of this include HIV/AIDS, hepatitis B and C and certain sub-types of cancer.
Mann Bioinvest believes that this trend is not only set to continue but accelerate as technological advances allow us to delve further into the field of genetics and pave the way for truly personalised and targeted therapeutics.
While these medical advancements are exciting, it takes many years of development and vast sums of money spent on clinical trials before therapies make it to market. The rewards for success are high, however successes are typically few and far between. Thus, the research and development of new therapies often occurs in smaller entrepreneurial companies spun out of academic institutions with a high degree of specialisation. If this is the case, given the high funding requirement to progress a therapy through the necessary clinical trials, collaborations are often formed between these and the larger biopharma companies that also posess the sales and distribution infrastructure to promote the new product.
It is this symbiotic relationship that will provide opportunities for the larger companies with low cost of capital to replace products coming off patent and further their growth with new novel therapies.
This potential for innovation and the ability to grow revenues combined with stable cashflows and profitability from mature franchises, make the biopharma sector one of the most attractive defensive sectors in the investment universe.
Source: National Human Genome Research Institute
Source: National Human Genome Research Institute
It is widely known that the developed market’s ‘baby boomer’ generation is fast approaching retirement age. A fact that is often overlooked however, is that the populations of the most significant emerging markets are also facing a balloning in their populations over the age of 65. That is to say, the global population is aging at a rate unprecedented throughout history.
While the healthcare spend per capita between developed and emerging markets is vast in absolute dollar terms, age remains a significant driver of an increasing healthcare spend in both markets. More specifically, proximity to life expectancy (death) drives a dramatic increase in healthcare spend in older generations. Nothing that life expectancy in emerging markets still lags that of developed markets, there is set to be a dramatic increase in the healthcare spend in the near future.
This trend is a mathematical certainty and as demonstrated in the chart below is projected to persist beyond the year 2030. This will benefit the biopharma sector in two ways as the demand for current day therapies increases but will also likely open up new markets for life extending technologies yet to be developed.
Source: U.S. Census Bureau
Sales into emerging markets by the leading global pharmaceutical companies now accounts for more than 20% of total revenues. Further to this, it is anticipated that the majority of top line growth will be driven by increasing sales to emerging markets for some time to come. While the margins associated with this growth are not the super charged margins of new branded products generated in the U.S., it should be noted that a considerable 85% of all prescriptions in the U.S. are for generic products.
An important element here for investors is that they are benefiting from the emerging market growth story while investing in companies with sound corporate governance.
Source: IMS Market Prognosis, May 2012, Economist Intelligence Unit, January 2012
The pharmaceutical sector is currently trading at low valuations on an absolute and relative basis.
PE ratios of pharmaceutical companies currently trade at a discount to market while presenting better prospects for top line growth. While faced with the headwinds of the patent cliff many companies have been able to gain efficiencies to maintain profitability and source replacement therapies for their maturing pipelines.
For the first time in many years, the potential sales from pipeline therapies due for approval within the next 2 years is greater than those therapies coming off patent which marks a turning point for the sector and presents a catalyst for the re-rating (on a PE basis) of the sector as a whole.
Source: BofA Merrill Lynch Global Research