Feature – Investing in healthcare
Comirnaty is not a typical name for a hero. The one who arrives in times of trouble to save the world. But that is exactly what it might do, and there are a group of investors somewhere who are celebrating. Few people outside of China had heard of Covid-19 at the start of 2020, but the virus soon ravaged the world, killing almost 2 million people by the end of the year and decimating econo- mies as governments told their citizens to stay at home. Then, towards the end of the year, US drug giant Pfizer and German biotech BioNTech secured regulatory approval for a vaccine – Comirnaty – and world leaders lodged orders collectively worth tens of billions of dollars.
There are many similar stories. Pfizer has earned billions of dollars since anti-impotency drug Viagra hit the market in 1998, while another US drug-maker, Gilead Sciences, has made a healthy profit from selling hepatitis C treatment Soval- di. A course initially cost up to $100,000 (£75,000) and was the first such treatment to be approved in the US, where there are around 3 million suffers. When Covid-19 hit, private investors, hoping for exposure to the medical world’s next big thing, joined governments and foundations to collectively invest almost $40bn (£30bn) by August to find a cure, says Devex, a media platform for drug developers.
This is on top of the $50bn (£36.5bn) that pension funds and other institutional investors around the world invest in bio- medical equity each year, according to Slavek Roller of Goethe University Frankfurt. But investors who have no experience of drug development should not be tempted to rush into the market before consider- ing the huge risks involved. For every one of Pfizer’s successes there are many investors counting their loses from developers’ whose drugs failed in clinical trials, meaning that despite years of pumping cash into those businesses they never earned a sin- gle dollar from their research.
Drugs are usually tested in labs before being given to volun- teers. Even if it passes that stage of the trials, which assesses safety, efficacy is only tested in the second phase. The third and final stage mass tests sufferers and is usually make or break for the developer in proving that it works. Even if a drug is ap- proved there is the risk that governments or insurers will refuse to pay what the inventor believes it is worth, so drug development may not be a good fit for mature final salary schemes. It is for good reason that it takes years to develop and test new medicines. Producing a chemical reaction in people is danger- ous. No one wants to be responsible for the next Thalidomide, the morning sickness treatment that caused limb deformities in babies in the late 1950s. If this is true, then why, I hear you ask, did Comirnaty and the other five vaccines that have since been approved around the
56 | portfolio institutional December–January 2021 | issue 99
world reach the market within a year? These are the exceptions, not the rule. They were fast-tracked as the virus was causing enormous disruption and pushing healthcare services to their limit. A similar process is available for rare medical conditions, where lower costs and longer periods of exclusivity are offered to tempt investors to develop treatments known as orphan drugs. The hunt for a Covid vaccine was boosted by researchers fun- damentally changing the way they developed virus samples. This relied heavily on Chinese scientists. They were the first to identify the genetic sequence of Covid-19 as early as mid-Janu- ary 2020 and made it widely available. This speeded up the development process by enabling scientists to use existing genetic material in their research rather than creating the virus from scratch in a lab.
Strong trends The Covid crisis has shown how important healthcare is and for investors the underlying trends driving the market are attractive. They include aging populations with one in seven Brits forecast to be over the age of 75 in the next 20 years. Changing lifestyles and increased income levels across emerg- ing markets are also factors as is innovation. The collaboration that saw the rapid development of the Covid-19 vaccines is an example of increasing efficiency in drug development. Chronic lifestyle-related illnesses are rising, such as diabetes. The cost to the NHS and other health services is growing with the number of sufferers of these uncurable conditions expected to reach 642 million by 2040, a rise of 54% in 25 years. Indeed, King’s College forecasts that the cost of managing the condi- tion will almost double to $2.5bn (£1.8bn) by 2030. But there are ways to gain exposure to these trends for less risk. Investors could back the commercial-phase giants of the indus- try which have several drugs on sale and many more in devel- opment, such as GlaxoSmithKline, Sanofi, Johnson & John- son, Roche, Novartis, Merck and Pfizer. If any of their drugs fail to reach the market, it will mean money wasted but will not take a large chunk out of their value. Indeed, AstraZeneca’s share price fell only 1.5% after announc- ing disappointing results from third phase trials of an asthma drug in December, while US small cap Neurotrope lost 80% of its value 18 months ago when tests proved its Alzheimer’s drug did not work.
Pharmaceutical and biotech developers are not the only players in the market. Healthcare also includes medical technology, private hospitals, care home operators for the elderly and disa- bled as well as owning clinics and GP surgeries. The range of options is equally broad in terms of asset classes, from plain vanilla investments in equity, private debt or the rights to future earnings. But what all aspects of this sector have in common is that investments tend to predispose active
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