In 2023, the healthcare sector faced challenges in keeping pace with the broader equity market. However, Portfolio Managers Andy Acker and Dan Lyons hold an optimistic view of its long-term prospects.
Healthcare's defensive stocks have experienced a dip in investor interest this year, possibly due to concerns about higher interest rates and potential economic slowdown. Nevertheless, the sentiment surrounding the sector may undergo a transformation.
One compelling aspect is that the healthcare sector is currently valued below the market average, offering attractive valuations that could enhance its long-term return potential. This undervaluation presents an opportunity for investors seeking value in the market.
Beyond the sector's defensive qualities, it boasts substantial opportunities. Approximately $600 billion is available for mergers and acquisitions (M&A), signalling the potential for consolidation and innovation.
Time may be ripe for biotech investment
"We believe that now is an opportune time to invest in the healthcare sector. Often, investor interest wanes after a period of underperformance, precisely when we believe it should increase," Janus Henderson portfolio manager Andy Acker said.
While this year has seen a surge of interest in technology and artificial intelligence, initial expectations of an impending recession have given way to a more gradual economic slowdown and decreasing inflation.
Nonetheless, risks remain, and the effects of monetary tightening may lead to a significant economic slowdown or recession in 2024. During such uncertain times, the healthcare sector's defensive characteristics are poised to shine.
Additionally, healthcare valuations are currently trading at significant discounts compared to the overall market, despite historically commanding premiums due to their resilience and growth potential.
"And then finally, you have this wave of innovation where we’re seeing this revolution in biology that’s driving so many new products,” Acker continued.
“This year we think will be a record year for new products; as many as 80 could be coming to the market. And this is driving a whole new product cycle in healthcare that we think could drive growth, not just for the next few years, but for the next decade or more."
Janus Henderson portfolio manager Dan Lyons emphasised the uptick in acquisitions and ‘takeouts’ within the sector this year.
“So, we’re also seeing that large pharma has a huge need to fill their pipelines, and they’re going out and going shopping and buying companies that are truly innovative in this space,” he said.
“And so, we think that there’ll be even more of that to come.
“I’ve seen estimates of around $600 billion of cash that’s out there available for potential spending on M&A [mergers and acquisitions]. And we think that’s going to be an important driver of interest in the sector, as well."
Biotech companies on the move
With so much potential brewing in the healthcare sector, here are some mid- and small-cap companies making moves in the biotech industry.
Imugene Ltd (ASX:IMU, OTC:IUGNF): Imugene is developing an immune-oncology platform that seeks to galvanise the body’s immune system in its fight against cancerous tumours.
The clinical-stage company is developing off-the-shelf (allogeneic) cell therapy CAR T drug Azer-Cel, an oncolytic virus and B-Cell therapies aimed at treating a variety of cancers in combination with standard of care drugs and immunotherapies.
Emyria Ltd (ASX:EMD): Emyria is developing cannabinoid and psychedelic-based therapies for mental health indications, combining its clinical arm with a network of specialist clinics to provide new therapies for unmet psychological needs.
Orthocell Ltd (ASX:OCC, OTC:ORHHF): Orthocell is a regenerative medicine-focused biotech engaged in developing cutting-edge products that improve and accelerate healing in everything from dental injury to nerve repair and cartilage restoration.
Anteris Technologies Ltd (ASX:AVR, OTC:AMEUF): A structural heart company developing medical device solutions for heart disease and related indications. The company is developing a novel, first-in-class biomimetic transcatheter aortic valve replacement (TAVR) for the treatment of aortic stenosis.
Recce Pharmaceuticals Ltd (ASX:RCE, OTC:RECEF): Recce is an anti-infective focused biotech pioneering a new class of synthetic anti-infectives targeted at antibiotic-resistant superbugs. So far, all tested bacteria have been unable to develop resistance.