Covid-19 has shown how vital the healthcare sector is. But with assets ranging from Big Pharma stocks to hospital REITs, what should investors do?
As the world grapples with current and future health crises such as the next pandemic caused by Disease X, the spotlight on healthcare is set to continue. The knock-on effects of the Covid-19 pandemic have overwhelmed healthcare systems worldwide, but there is also a greater focus on improving healthcare quality on the back of digitalisation, consumerism and the entry of non-traditional players.
Around the globe, governments, institutions, healthcare professionals and investors are working on resolving rising healthcare costs, health equity, and provider shortage. This is assisted by breakthrough pharmaceutical innovation, the greater use of telehealth and automation.
Singapore may be small, but the country’s healthcare sector consistently tops global and regional rankings. The Singapore government has invested heavily in healthcare infrastructure, and the city-state boasts some of the world’s best hospitals, clinics and medical facilities. The city-state is also home to several large pharmaceutical and medical technology companies on the cutting-edge of R&D.
One of the key drivers of growth in the healthcare sector has been the country’s rapidly ageing population. Singapore Department of Statistics data shows that the proportion of residents aged 65 and above is expected to increase from 15.2% in 2020 to 21.5% by 2030. This has increased the demand for healthcare services, including medical consultations, treatments, and medications. As a result, many healthcare companies have been experiencing growth in revenue and profitability, despite the Covid-19 related support for the country tapering off.
A recent report by the Ministry of Health shows that Singapore’s healthcare industry is expected to grow at a CAGR of 8.5% between 2020 and 2025, reaching a value of $29.6 billion by 2025. The report also highlights the increasing importance of digital health technologies such as telemedicine and digital health records, in improving healthcare outcomes and efficiency.
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Still, the government is aware that the Covid-19 pandemic has accelerated the adoption of digital health technologies and highlighted the importance of investing in healthcare infrastructure and research. DBS says in its 4Q2022 CIO Insights report last October that the healthcare sector is one of the “long-term secular themes that are beneficiaries of demographic changes and new lifestyle choices”.
Area of growth
Despite the near-term headwinds posed by supply chain disruptions, DBS believes the medical equipment segment represents a strong area of growth for healthcare. “Structurally, healthcare devices and services have outperformed global equities. Return on capital for healthcare devices easily outstripped global equities over the last two decades reflected in this sector’s structural outperformance over global equities. We think this will continue,” says DBS Bank’s chief investment officer Hou Wey Fook.
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RHB Group Research analyst Shekhar Jaiswal expects Singapore to continue spending heavily on this sector. “Singapore’s healthcare demand and spending will increase due to an ageing population, heavier chronic disease burdens, technological advances and a more well-informed and perceptive population,” he tells The Edge Singapore.
Among its Asean peers, Jaiswal says Singapore spends the most annually on healthcare per capita, which is seen to pick up because of the demographics. Healthcare expenditure, excluding pandemic-related costs, currently stands at about 2.3% of GDP. “Healthcare spending is expected to rise to 2.9%–3.5% of GDP between 2026 and 2030 as a result of an ageing population, increased healthcare utilisation, and medical inflation,” he says, adding that much of the increased spending will go towards earlier diagnosis of chronic conditions, close monitoring and follow-up.
Apart from higher government spending, Jaiswal expects a greater integration use of primary healthcare facilities, increased home care opportunities and expansion overseas amid growing medical tourism on the outlook. Overall, he sees an investment case for the healthcare sector. With the pandemic over, Jaiswal believes that the focus will be returning healthcare services to pre-pandemic normalcy and preparing the sector to meet the country’s longer-term needs.
While the Covid-19 support by the hospitals has been a great financial boost, potential government and private collaborations may be less profitable to the private hospitals. Paul Chew, head of Phillip Securities Research, says: “Covid-19 projects were extraordinarily profitable due to the urgency and lack of supply. We think other partnerships with the government will provide the volume but not the margins.”
“Healthcare is a mature sector. Pre-pandemic, private hospital admissions were rising around 1% per annum. Growth is from revenue intensity or complexity of the cases. Private healthcare in Singapore has to compete with public healthcare. The main source of growth will come from foreign patients or expanding overseas,” adds Chew.
Maybank Securities analyst Eric Ong sees the Singapore healthcare sector as an attractive one despite the tapering off of Covid-related revenues, mainly due to the recovery of medical tourism, especially with China’s reopening and the rollout of the “Healthier SG” initiative, which seeks to focus more on preventive care.
Budget 2023 has also given the healthcare sector a more positive outlook. Ong says: “We see the recent budget announced by the government being helpful in two ways: More baby bonus cash gifts and government-paid paternity leave to encourage parenthood; and top-ups to ElderCare Fund and MediFund to support seniors, especially lower-income ones, for their healthcare needs.”
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Still a haven?
Amid uncertain and volatile stock markets, growing geopolitical tensions and rising interest rates, investors tend to turn their attention to traditionally defensive assets such as gold, treasuries and fixed deposits. The healthcare sector has also been touted as a safe haven, given its low correlation with global macro conditions and the strength of its underlying trends.
Healthcare stocks have shown resilience compared to the broader market — from the start of 2020 to the end of 2022, for example, the global healthcare sector has provided 30.5% in total returns (including dividends) versus the MSCI ACWI broader global index, which provided 14.2% returns. “Quite rightly, it has been seen as a haven,” Fidelity International portfolio manager Alex Gold tells The Edge Singapore.
There are many reasons why the healthcare sector was able to retain its resiliency. For one, many companies within the sector sell products and services which are non-discretionary. Gold adds that patients with chronic diseases may also need to be on certain drugs for the rest of their lives, contributing to resilient demand regardless of macroeconomic factors such as inflation or deflation.
The same resiliency can be found within markets in the Asia Pacific region. Over the last five years, healthcare stocks have outperformed the broader markets, led by countries such as India, China, Australia and New Zealand, says Sandeep S Wasan, managing director and head of Asean healthcare group at Citi.
In Asia, which houses 60% of the world’s population, demand for healthcare services and products is poised to increase. This is supported by rapid urbanisation, the ageing population, governments’ increasing focus on public health, and the increasing prevalence of major diseases such as cardiovascular disease and cancer.
This opportunity results in a two-year forward growth projection of over 10% for Asia Pacific healthcare companies versus just below 5% for S&P healthcare companies.
“Last year alone, we witnessed peak transaction volume despite the overall slowdown of 180 deals done by global healthcare players and investors transacting with Asian healthcare companies,” says Wasan, speaking at a forum on healthcare organised by the Singapore Exchange.
The market’s growth potential has also attracted plenty of investment. Wasan says the so-called “dry powder” in the region has grown three times the amount that it was five years ago, translating to approximately US$30 billion ($40.6 billion) of dedicated capital to invest in Asian healthcare. This is a real recognition of opportunities in the region which also means that future deals will be core competitive.
Better care, lower costs
Supported by strong fundamentals and long-term drivers, the healthcare sector provides investors with various opportunities. Among the trends driving the sector is digital technology, which has the potential to allow for better clinical decision-making and improve the quality of care at lower costs, says Wasan.
Application programming interfaces or APIs are increasingly used in healthcare, making it easier for patients and providers to share health information. Healthcare professionals are also increasingly equipped with automation tools and real-time data, which improves procedures and post-surgery outcomes, among others. Pharmaceutical companies and drug developers are also starting to employ digital tools in their operations, with real success across the entire value chain, he adds.
There is a growing number of companies in Asia using artificial intelligence (AI) to understand better disease mechanisms and more efficiently identify drug targets, with a meaningful impact on drug development timeline and costs. Hong Kong-based Insilico Medicine, for example, had recently raised US$250 million after showcasing deep learning and AI to cut the time and costs involved in drug development by as much as 90%.
Consumers also demand better healthcare experiences delivered with greater immediacy, convenience and transparency. The Covid-19 pandemic has forced people to reimagine health, including remote healthcare, with data-led, high speed and scalable responses, says Wasan. These changes are coupled with a wave of innovative entrants on the back of regulatory upheaval.
“The rise of telemedicine is disrupting the traditional care model by providing easy and immediate access to healthcare. Those living in one of the 6,000 inhabited islands in Indonesia can now go online to access specialists via telehealth providers at a fraction of the cost. The uptake and convergence of tech with healthcare will continue to be driven by increasing smartphone penetration in Asia.”
Southeast Asia’s telehealth providers include Singapore’s DoctorAnywhere and Speedoc, Indonesia’s Alodokter, Malaysia’s DoctorOnCall and the Philippines’ HealthNow. DoctorAnywhere, for example, is one of the investee companies of IHH Healthcare Q0F , a Malaysian sovereign wealth fund Khazanah Nasional-backed regional healthcare group.
Asian healthcare companies are heavily investing in innovation. This includes investing in rapid advances in novel sequencing and test technologies to improve early detection, such as liquid biopsies, a highly-sensitive non-invasive alternative to surgical biopsies capable of increasing cancer survival rates. Over the next five years, the Asia Pacific liquid biopsy market is expected to grow at a CAGR of 30%, twice the global average, says Wasan.
He adds that significant financial pressure will build towards the middle part of the current decade, as big pharmaceutical companies are poised to lose market exclusivity for many top-selling drugs, putting about US$100 billion of revenues at risk.
The need to rebuild these pipelines has led to active M&A activity over the past two years. Recognising the groundbreaking innovation of Asian biotechnology companies, especially in gene therapy and immuno-oncology, large US and European pharma companies have participated in marquee deals in the region. Wasan adds that Singapore is one of the countries that has attracted interest from these global companies and blue-chip investors.
With the global IPO market slowdown, many US biotech companies have less than two years of cash runway. This has led several small and mid-cap companies to out-license and deal with Asian companies, giving rights to some of their lead drugs to help shore up their balance sheets.
There is also a real global industry trend towards streamlining businesses to focus on growth and capture valuation. There is an expected US$150 billion of businesses being spun out of conglomerates in 2023. “Growing health initiatives and increasing access to care makes Asia Pacific a prime landscape for healthcare investments, with Singapore driving a lot of innovation that will be very helpful for the rest of Asia,” says Wasan.
IPOs in the region
Aside from delivering steady returns over the past few years, selected stocks within the sector related to the Covid-19 pandemic have also provided investors with outperformance amid a volatile market. Fidelity’s Gold would not describe the current healthcare sector as “exuberant”.
He says there is certainly a renewed appreciation for the contribution many companies provide to society. This was most evident during the pandemic when diagnostics were rapidly developed to help identify those with the virus on top of unprecedented accelerated vaccine developments. However, the revenue associated with those treatments lasted only a couple of years, mainly in 2021 and 2022.
“Additionally, investors value companies based on their cash flow generating power over decades rather than years. In terms of valuation, the MSCI Global Health Care Index trades at 16 times 2024 P/E, which aligns with its 10-year history. This compares to the broader market, which trades at about 14.3 times 2024 P/E, also in line with history. At a high level, therefore, we don’t view the healthcare sector as expensive,” says Gold.
Despite Asia’s global downturn in equity markets, there were over 100 healthcare-related IPOs last year, mainly in China. Although the quantum of capital was a fraction of what was raised in 2021, a “significant” number of companies were able to raise capital last year, particularly in China A-Shares. Twenty-two medical and pharmaceutical A-share IPOs took place in the first half of 2022, raising about RMB29.8 billion ($5.7 billion), based on estimates by PwC.
One such company with a successful A-share listing last year is Beijing Foyou Pharma, which raised RMB1.75 billion for its listing on June 30, 2022, at RMB14.62 apiece. The company mainly conducts R&D, production and sales of pharmaceutical preparations and medical devices.
There are also several successful healthcare IPOs on the Shanghai Star Board. One notable example is the imaging and radiotherapy company Shanghai United Imaging Healthcare, which raised RMB11 billion for its listing on Aug 22, 2022, at RMB109.88 each. Shares of the counter rose as much as 73% shortly after trading commenced, reaching as high as RMB189.99 per share.
Southeast Asia also saw some successful healthcare listings. One such IPO was done by Indonesia’s Jayamas Medica Industri, which manufactures and distributes medical equipment and supplies. The company raised US$53 million, representing a market cap of US$351 at its listing on Nov 8 last year.
The universe of listed healthcare stocks in Singapore is less exciting, swayed by three delistings last year. Nonetheless, a continuous pipeline of companies is ready to tap the capital markets to fund their growth. One example is the Singapore Institute of Advanced Medicine Holdings, backed by Malaysia’s Berjaya Corp in November 2011. The company provides medical diagnostics and treatments, radiation therapy and medical oncology services. It has plans to list in Singapore, although the timing has yet to be confirmed.
Fund focus
Besides investing in healthcare companies directly, investors can do so via a range of funds, with various global healthcare-focused funds put together by various asset managers. Examples include the United Global Healthcare Fund and the Fidelity Sustainable Global Health Care Fund.
As of February, the United Global Healthcare Group’s top five holdings are healthcare and insurance company UnitedHealth Group (7.14%), pharmaceutical company Eli Lilly & Co (5.43%), biotechnology companies AstraZeneca (4.89%) and Pfizer (3.99%) and life sciences conglomerate Danaher Corp (3.49%). The fund provides returns of 2.85%, 5.10% and 11.44% over the three-year, five-year and 10-year periods.
Meanwhile, as at January, the Fidelity Sustainable Global Health Care fund’s top five holdings are UnitedHealth (8.3%), medical equipment provider Thermo Fisher Scientific (5.3%), and pharmaceutical companies Roche (5.1%), Abbvie (5%) and AstraZeneca (4.8%). The fund provides returns of –2%, 6.1% and 10.3% over the one-year, three-year and five-year periods.
Fidelity’s Gold explains that the fund’s strategy looks for companies with attractive returns on capital, good free cash flow and astute capital allocation within growing end markets. The firm has found that the best opportunities within healthcare are in the “picks and shovels” of the industry. These companies within the life sciences and tools of the healthcare value chain provide diagnostic equipment, manufacture drugs for biotech and pharma companies, and help them run clinical research trials.
These companies have attractive, long-term growth prospects without the associated clinical trial readout risk, which many pharma and biotech companies have, Gold says. The Fidelity Sustainable Global Health Care fund has delivered “reasonably strong” performance over the last five years with good performance versus both the MSCI ACWI Health Care Index and the broader MSCI ACWI, he adds. However, the fund did underperform in 2022. This was due to material underweight exposure to large-cap biotech and pharmaceutical companies, which makes up about 55% of the global healthcare index but only about 35% of the fund.
This sub-sector within healthcare is particularly defensive and performed strongly last year, which led to underperformance for the fund versus the healthcare index, says Gold. “This reversed the very strong gains and relative outperformance of the fund in 2021, which is to be expected during these periods of elevated uncertainty.”
The majority of the companies that the fund invests in are domiciled in the US or Europe. Many of these companies are global, with some having as much as 20% of their sales in China alone. He adds that others have significant exposure to countries outside the US, where healthcare spending grows rapidly.
“Healthcare spending continues to rise across the Asia Pacific, with almost all countries spending significantly below the 18% of GDP the US spends on health care. We expect continued growth, and many companies we invest in sell their products to the Asia Pacific region.”
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