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Healthcare earnings to come up trumps in 2017

Republican sweep of White House, Congress and Senate will bolster healthcare stocks next year, says Worldwide Healthcare Trust.

Healthcare earnings to come up trumps in 2017

A Republican sweep of the White House, Congress and Senate will bolster healthcare stocks next year, despite Donald Trump’s lack of a plan, says Worldwide Healthcare Trust (WWH) .

The trust, which has a market value of £969 million, reported half-year results that showed a net asset value (NAV) total return of 21.2%, beating its MSCI World Health Care index benchmark, which returned 17.3%.

The shares are currently trading at £20.93, at a 2.2% discount below the NAV. The discount had widened to nearly 7% over the six months to 30 September, prompting the trust to spend £27.5 million on buying back over 1.4 million shares. Of those, 88,000 were later reissued at an average discount of 2.7%.

The trust has had a better start to the year than the previous one, with less market volatility and a backdrop of rising global equities between 1 April and the end of September.

‘Healthcare stocks appeared to be defensive in the early portion of the period; their defensive nature peaking into and out of Brexit, ‘said Samuel Isaly, fund manager at OrbiMed Capita which manages the trust.

‘However, as the tumult waned so did healthcare equities and performance of healthcare stocks did not outpace the broad market on a net basis over the six-month period.’

Bigger than Brexit, was the impact the US presidential election had on healthcare stocks as fears that Hilary Clinton would clamp down on price gouging accelerated. The shock victory by Donald Trump brings with it a lack of clarity on the direction of the healthcare sector – mostly due to his dislike of Obamacare – but this is of less concern to Isaly.

‘Valuations are low and fundamentals are solid, but the dramatically altered political landscape, given the outcome of the US elections, perhaps creates the biggest tailwind for 2017,’ said Isaly.

‘A Donald Trump-led White House may create some uncertainty in healthcare stocks given a lack of transparency of his policies going forward. However, what we now know will not happen is much more important.’

He added that the Republican sweep of the White House, Senate and Congress means ‘any threat of Democratic ideals on drug pricing and/or single-payer system coming to pass are now 100% quashed’.

‘This overhang that persisted over the sector during the past 18 months is now gone and, once the fog of politics lifts, we fully expect therapeutic stocks to do well in 2017,’ said Isaly.

The number of news drugs approved by the US Food and Drug Administration (FDA) slowed in 2016, which Isaly said was ‘disappointing but we view it more as cyclical rather than a sign of a downturn in therapeutics’.

‘The number of new drugs approved by the FDA over the previous two years combined was 40% more than any other two-year period in history. The rate was understandably unsustainable,’ he said.

Numis Securities analyst Charles Cade said the fund’s allocation and stock selection had ‘contributed positively’ although an underweight position in the largest pharma stocks crimped returns as they enjoyed strong gains.

‘We view Worldwide Healthcare as an attractive vehicle for investors looking for a diversified portfolio of innovative healthcare companies,’ he said.

‘The fund has an excellent long-term track record through stock-picking based on fundamental research, and is less volatile than most of the listed peer group, which tends to focus on biotech,’ he added.

Although Cade said sentiment had moved away from healthcare in 2016 the ‘valuations are now attractive…and in the long term there is potential for strong earnings growth in the sector driven by innovative new drugs with robust pricing power’.

Stocks that have helped and hindered Worldwide Healthcare over the past six months:

Performance contributors

Exact Science (EXAS.O): shares in the diagnostic screening company were at an all-time low but re-rated after positive results for a screening test for early detection of colorectal cancer.

Boston Scientific (BSX>N): uptake in implantable medical devices say new product launches and share gains. The shares were also boosted by the settlement of a tax dispute.

Wright Medical Group (WMGI.O): this joint replacement developer benefited from the development of its new orthobiologic product and an acquisition.

Intuitive Surgical (ISRG.O): the company expanded its market as it developed new robotic applications, such as hernia repair.

Abbvie (ABBV.K): sentiment had waned over the prospects for this drug giant but those who were bullish on the stock were rewarded as its surged ahead on better-than-expected revenues and earnings.

Performance detractors

Ono Pharmaceutical (4528.T): the share price almost doubled in 2015 and reached a high in April 2016 as its Japanese market expanded rapidly but fears about government price intervention.

Bristol-Myers Squibb (BMY.N): in partnership with Ono, this company trialled a treatment for lung cancer which proved to be a failure and both stocks collapsed. Ono’ share price is now half its 52-week high.

ImmunoGen (IMGN.O): shares in the antibody drug company fell twice as it treatment for ovarian cancer failed to deliver and then the company announced it was selling convertible notes to raise capital.

Novo Nordisk (NOVOb.CO): US pricing pressure caused the Danish drug maker to lower its long-term growth guidance. The shares fell 20% in response.

Dynavax Technologies (DVAX.O): this biotech company suffered regulatory setbacks in the approval of its hepatitis B vaccine Heplisav.

Allergan (AGN.N): despite making a number of acquisitions over the past five years, Allergan failed in its bid to merge with Pfizer and the deal led to changes in regulation to prevent ‘tax inversion’ deals, which are used by multi-nationals to lower their tax deals by buying a rival that is established in more tax-advantaged environment.

1 comment so far. Why not have your say?

William Cunliffe

Dec 03, 2016 at 09:22

I would not buy this share

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