I have covered the healthcare sector on and off for the past 20 years for my sins. In the US in particular it is a hotbed of life-changing innovation that has spawned a new generation of drug and med-tech giants.
But would I invest in the sector? Probably not. Backing the small, up-and-coming firms is often risky with many more failures than successes.
Outcomes tend to be binary - a treatment, or device either works or it doesn’t.
If you are looking for income, the bedrock of any portfolio if reinvested, then your options are severely limited.
That leaves little room for capital appreciation.
There are also the big, structural issues to get one’s head around. The flawed Obamacare system in the US is one, while the unwillingness of payors (health services and insurers) to pony up for expensive new treatments is another.
In some respects you are better off throwing a dart blindfolded at the Financial Times prices pages.
Okay I jest. But it is difficult picking winners.
Paul Major, of Bellevue Asset Management, agrees there are many elements you need to factor into your investment equation.
Picking winners in the sector is tough, but isn’t impossible
But, while the task of picking winners in the sector is tough, it isn’t impossible, judging from Bellevue’s track record.
It manages the BB Biotech Investment Trust that has delivered a compound return of 15% annually since its inception 23 years ago. BB Biotech is listed on the Swiss Stock Exchange.
In managing the trust, Major and the Bellevue team have become experts not just in the technology and platforms being developed but also how these companies fit into the wider healthcare market.
Over time they have compiled a comprehensive understanding of how the whole ecosystem works and is interconnected.
The impediment to expanding BB Biotech’s scope was its mandate, which meant it could only really invest in a subset of the wider market - biotechnology.
That is why several years ago the team around BB Biotech began to consider setting up an investment vehicle with a broader remit.
Very rigid internal discipline to stock-picking
While BBH can be more expansive, there is a very rigid internal discipline to stock-picking.
The fund has a cap of 35 companies in which it can invest (it is currently up to 32) and while it takes stakes in specific businesses it does so to garner exposure to investment themes that are rigorously assessed to drive innovation and value.
“There is the confluence of a macro-top down view and then this bottom up stock-picking model,” explains Major.
“We are different from other investment trusts as we are totally unconstrained so can have zero exposure to certain parts of the sector.
“Equally we can have as much exposure we deem as appropriate from a risk point of view to anything we like.”
The BBH team reckons the healthcare industry will continue to grow at a brisk pace, underpinned by demographic factors such as the West’s ageing population and an increase in wealth.
But as mentioned above, there is now a reluctance from these countries to shell out more for new and expensive treatments.
Against this backdrop, companies have to possess certain attributes to succeed and flourish, says Major.
“They have to improve outcomes, demonstrate value for money and they have to make the system work better,” he explains.
“The problem for a physician is how does he or she allocate medical capital efficiently? Tools to help them do that are a big focus for us.
“We look at areas where we see sustainable long-term growth and we avoid anything where we think the market is implying levels of returns that are unsustainably high.”
US global hub for the healthcare industry
Many of BBH’s investee companies are in the US, just because it is the global hub for the industry and the capital used to bankroll nascent technologies.
It eschews the big conglomerates such as the aforementioned GSK,
AZ and Pfizer because of their growth prospects and lack of focus, concentrating on the innovative, fleeter footed small- and mid-caps.
The one thing the latter grouping doesn’t traditionally provide is steady dividend.
BBH aims to correct that by making a payout from the company’s net asset value (NAV), which on current calculations, should generate a yield of a 3.5%.
It will be a progressive dividend if the trust can emulate the success of the Bellevue-run BB Biotech.
So that marks it out in the sector, as does a mechanism called a redemption option under which BBH can efficiently return capital to investors if they desire it.
There are a number of advantages to operating this system. It means small investors aren’t at the mercy of the market-makers and their often bafflingly wide spreads.
The redemption option also works well for the big, institutional investors, offering the chance to get into the stock in scale and exit without being murdered.
A trendsetter in the world of healthcare
In other words it promotes liquidity. And while BBH isn’t the first to offer this entry and exit, it is a trendsetter in the world of healthcare.
The shares, priced at 100p each when they debuted on December 2, valuing the company at £150mln, are now changing hands for 112p.
Major will be hoping BBH can build on that momentum to emulate BB Biotech, it’s big sister, worth £2.4bn, which is quoted in Switzerland.
There is no doubt in Major’s mind that the fundamentals are there to make the trust a winner.
"What I think we have done is constructed something that is best in class in terms of how it’s run and managed and gives the opportunity to get yield from quality healthcare assets."