Healthcare is a natural place to look for high quality, defensive companies, writes Morgan Stanley Investment Management’s Helena Miles. In many cases, revenues and barriers to entry are protected by patents, regulations and long-term contracts.
However, the longer-term compounding power of individual companies must be considered on a stock-by-stock basis, as fortunes can diverge materially. It is not enough to rely on long patent lives, generous pricing and decade-old therapies and frameworks. Instead, companies must have the ability to innovate, provide new therapies and treatments, and participate in scientific paradigm shifts, all of which may directly impact longer-term earnings power and the ability to sustain high returns on operating capital.
One of the most important shifts to consider concerning healthcare companies is the development of ‘personalised medicine’. This is impacting many parts of the healthcare value chain and is paving the way for novel therapies and cures for diseases that were once thought to be incurable. Take, for example, Usher syndrome, a rare genetic disorder that causes deafness and blindness in young children, for which there is currently no cure.
Formulating a cure for diseases such as this will be revolutionary, but the science and technology underpinning it is not new. It lies in the process of ‘genomic sequencing’, which involves comparing the genetic make-up of someone with a particular disease to that of someone without it, allowing researchers to identify the faulty gene that is the cause.
In 1990, sequencing the first human genome cost $5.5bn and took 13 years. Today it takes less than one day and costs approximately $200. Usher syndrome may one day be cured when the faulty gene can be replaced with a working one, preventing the onset of symptoms. Genomic sequencing has already been central to the development of treatment for certain diseases. Enter the era of personalised medicine: treating patients based on their genetic make-up, predicted response and risk of disease.
One step forward: the promise of personalised medicine
The genomic revolution has enabled a shift from a one-size-fits-all approach in healthcare to a personalised approach. Using the traditional one-size-fits-all approach is like walking into a shoe shop and buying any old pair of shoes without checking the size or trying them on. Personalised medicine is the tailoring of medical treatment to the individual genetic characteristics of each patient and their specific disease.
A Swiss multinational pharmaceutical’s Zolgensma is perhaps the most stunning example of gene therapy, a specific type of personalised medicine. Zolgensma works by replacing a faulty gene with a working gene and is used as a cure for inherited spinal muscular atrophy in young children.
While still in their early development and costly to access, gene therapies hold the promise of being able to cure a variety of medical conditions beyond this point.
Two steps back: the pitfalls of personalised medicine
The development of personalised medicine is a rocky road. Drug developers have faced the usual threats of trial failures where therapies are not effective or safe enough. Even in cases where these drugs make it through trials and are approved by regulators, some may carry unwanted side effects.
In the case of some gene therapies, only 25% of potential populations are eligible for treatment due to prohibitive costs and safety issues. On top of this, some physicians demand a better track record of safety for the drug before administering a “one-shot cure” that will affect the patient for life and cannot be reversed.
For conditions such as haemophilia, patients may prefer to stay on existing treatments and wait 10-to-20 years to see how the hoped-for cure is working. However, not all patients have this luxury. Children with inherited spinal muscular atrophy have a life expectancy of just two years, meaning Zolgensma is potentially lifesaving.
Impact of the personalised medicine revolution on investing in the healthcare sector
What do these promises and risks around personalised medicine mean for stock-picking opportunities? It may not be wise to own individual companies on the basis that they are developing a specific drug.
Single drug companies (such as early-stage biotechs) are on the front line of progress and drug development but are also the first to suffer from the setbacks. Single drug investments also carry significant risk and do not necessarily translate into longer-term compounding power, particularly once the drug goes off patent.
Fortunately, this revolution is not limited to the drugs themselves. The shift to personalised medicine requires extensive adaptations in the way that healthcare is provided, paid for and monitored, resulting in second and third derivative healthcare beneficiaries that offer investment opportunities.
As treatments become more targeted and complex, so too does the way diseases are diagnosed and monitored. How do you know which therapy to give a patient if you are not able to properly classify the specific type of disease? Diagnostics drive 70% of treatment decisions, and if treatments are changing, diagnostics must change with them. Diagnostic testing is crucial for health economics.
If physicians can correctly identify the relevant marker of disease through testing, healthcare systems do not waste drugs on patients who would never have responded to the drug in the first place. Diagnostics companies carry the benefit of having exposure to the trend of increasingly complex drug development, without the associated risks of trial failures, patent expiries and pricing pressures.
Healthcare has made massive strides in the development and delivery of personalised medicine. Revolutionary benefits to patients are also bolstering the compounding potential of these high-quality investments.
This article was written for Portfolio Adviser by Helena Miles, senior associate, international equity team, Morgan Stanley Investment Management.
