Sectorial Investment Strategy-health

A Sectorial Investment Strategy – Health


The health sector is considered to be one of the favorite defensive elements in the investment portfolio and represents approximately 15% of the S&P500.

The sector includes about 10 different sub-sectors, while pharmaceutical companies represent more than 50% of the value of the sector. The sector enjoyed almost rigid demand and characterized in low volatility relatively to the general index.

Health sector composition includes a high proportion of Global Large Cap companies which enjoy a large geographic dispersion, that helps to prevent dependence in the growth of a particular area.

At the same time, it is important to emphasize a number of substantial elements that causes to higher volatility than usual days in the health sector, which has traditionally considered defensive.

The composition of the health sector in the United States includes the subcategory of biotechnology, which weighs today more than 20%. Health, as opposed to biotechnology companies, benefits from existing and proven products that give them relative certainty, and are engaged mainly in the promotion and increase revenue and profitability alongside their R&D investments, and consequently their shares also benefit from lower volatility.
Biotechnology companies, in contrast to health companies, centers primarily on their R&D, as their pricing is determined by how well the experiments they conduct and permits from the FDA to provide them their retail and business ability which they aspire. By virtue of being of relatively young companies which characterized by lower definitely than that of health companies, their shares are also more volatile.

World HealthcareWe believe that, in the longer term, the sub-sector of biotechnology is expected to enjoy positive trends in the coming years, based on the number key factors, including: business and regulatory environment support more than ever before in new therapies and innovative products with commercial potential, shift from the era of chemical molecules to the era of biological molecules, the expectation of continued positive climate in the area of mergers and acquisitions (M&A) and increased production of cash flows, wich support large independent purchases alongside regular dividend distributions and buybacks.

However, the short-term focus should be on established and profitable companies. Important to pay attention to the high level of risk today compared to the last years involved in the health sector exposure due to the rising proportion of biotechnology companies, and it is important to realize that there is variation between companies in the industry.

In recent months, the health sector is going to face significant challenges, which are reflected in the industry’s performance in relation to the overall index. Since the beginning of the year has yielded the industry underperformance compared to the index, the S&P500. (1.67% compared to +6.68)
This negative trend can be attributed to a number of leading factors, including:

  1. Fears somewhat slower profitability of the industry.
  2. Fears of regulatory and public pressure related to the pricing of medicines and especially the biotechnology sub-sector.
  3. Expected slowdown in mergers and acquisitions which was one of the key growth engines of the industry in recent years.
  4. Concern about a number of health insurers.
  5. US election year adds an element of uncertainty when both candidates are holding on the agenda which clouded on the US health care reform.

Despite the above factors, which we believe are not fundamental and effects from the short-term, we continue to have a positive attitude about the health sector, based on a number of supporting factors, including:

  • A continuous increase in life expectancy and access to health services. In recent years, there has been an average annual increase of about 3% to 4% increase in life expectancy in OECD countries, and it is expected that this trend will continue in the coming years. In the long term, the percentage of people aged from 55 in the population among OECD countries amounted to 9% in 1960, compared to 15% in 2010, when estimates are that the number will rise to 27% by 2050. A similar trend is also expected regarding the percentage of people aged over 80 in the population.
  • Increase health budgets in most countries of the world. Against the background of the increase in the elderly population and the continuing need to provide more and more drugs and health services, health budgets in developed countries are on the rise. Spending on health in developed countries has grown in the years 2005-2013 the average annual rate of 4%, compared to GDP growth of only 1.4% average annual rate in these countries in the same period. Even in the event of an economic slowdown, the macro environment of the relatively robust health sector and the demand for products in the field are the last to be affected.
  • The launch of new drugs is expected to support continued sales growth of the industry. In 2011 there was a continuous increase in the number of patents that have expired and the market size of these drugs. This trend has been termed “the patent cliff”, as the main threat to the industry is the entry of generic drugs once the patent has expired, often 20 years after ratification. Entry of competing for generic drugs reduces the average of the volume of sales of the drug in about 90% as cheaper generics to approximately 80% / 85%, and in addition to the drug market share lost due to competition. However, it is expected that in the coming years (2016-17), the amount of drugs expected to lose patent is relatively low compared to previous years, significantly lower than the peak of 2011. However, the number of FDA approvals of new drugs is rising steadily in recent years, when this trend continued in 2015 and broke another record, after that in 2014 reached a record of 18 years, during which the FDA approved 41 new drugs. In 2015, the number of approval grew to 45 new drugs, the highest number of approvals since 1996. These drugs have a huge market potential and the ability to slow down the effect of “Patent Cliff” on healthcare companies. In addition, a high number of drug approvals is a positive indicator of process efficiency within healthcare companies and innovation of the industry (eg, Johnson & Johnson is expected to receive FDA marketing of 19 drugs by the year 2019 with the volume of one billion dollars in annual sales for each).
  • Relatively cheap pricing characterizes the shares of healthcare companies. Healthcare companies shares historically traded relatively at high multiples based on the view of their high profitability and investor perception of stability in those companies. Following declines in the shares in recent months, the pricing levels currently considered reasonable (expected EPS of about 15, compared with an average multiple of 14 over the last decade and 20 the last two years).
  • Relatively attractive growth forecast in revenues and profitability. According to projections, industry revenues are expected to grow at a rate of 8% and 7.4% respectively during 2016-2017. At the same time, the profitability of the industry is expected to grow by 12.5% and 10.5% in 2016-2017, respectively, higher than the CPI. This, led by the service and medical equipment sector, which is a focus on the long-term growth in the industry. This sector, characterized by efficiency measures in recent years, such as cost control, sales of negative-performing divisions, expanding command and control, and revenue growth expectations. In addition to IT processes in the health system.

XLV vs SPXAlong with all the above, it is important to emphasize a number of significant elements that lead to higher volatility than usual in the health sector, which has traditionally considered being defensive.

The composition of the health sector in the United States includes the subcategory of biotechnology, which weighs today more than 20%. Health, as opposed to biotechnology companies, benefits from existing and proven products that give them relative certainty, and are engaged mainly in the promotion and increase revenue and profitability alongside their R&D investments, and consequently their shares also benefit from lower volatility.
Biotechnology companies, in contrast to health companies, centers primarily on their R&D, as their pricing is determined by how well the experiments they conduct and permits from the FDA to provide them their retail and business ability which they aspire. By virtue of being of relatively young companies which characterized by lower definitely than that of health companies, their shares are also more volatile.

We believe that, in the longer term, the sub-sector of biotechnology is expected to enjoy positive trends in the coming years, based on the number key factors, including:

  • Business and regulatory environment support more than ever before in new therapies and innovative products with commercial potential. We are witnessing a new era when it comes to reports about the clinical results at an advanced stage, and it is evident that the FDA finds greater openness than in the past. According to the estimates, Many of the recently approved drugs has significant commercial chances and represent significant progress in treatment, such as hepatitis C, multiple sclerosis, and cancer.
  • The world of innovative pharma shifts from the era of chemical molecules to the era of biological molecules. Biological molecules are significantly highly complex and the ability to emulate them particularly low. This trend provides further support for the biotechnology industry and safer and more solid infrastructure than before. When the expected wider adoption of research using biological markers (Biomarkers), and Clinical trials aimed at specific genes that help support the R & D pipeline productivity in the long run.
  • At the end of 2012, the FDA launched his “breakthrough treatments” track, which was designed to accelerate the development of promising programs. These drugs are expected to be sold at higher pricing than generics drugs, due to clinical costs, marketing costs, and higher production costs and maintain a significant market share due to lack of possibility to switch between these options, which is expected to support companies in the industry.
  • The expectation of continued positive climate in the area of mergers and acquisitions (M & A). This, in part due to the passage of large pharmaceutical companies to a strategy of Recompense revenue lost from patents expires to the drug source and strengthening the pipeline in advanced stages from large biotech companies.
  • More and more large biotechnology companies manage to generate cash flows which support independent large purchases alongside regular dividend distributions and repurchases of shares.

Therefore, it is appropriate to note the high level of risk today compared to the last years in the health sector, due to the rising proportion of biotechnology companies.