November was a good month for the sector and for the Trust. The NAV of the Trust increased by 4.8% (GBP), and the benchmark index (NBI) appreciated 7.8% (GBP). This strong performance of the NBI was partly driven by the extraordinary performance of Moderna, a company with a Covid-19 vaccine in development, whose market cap increased from USD26bn to over USD60bn and now has a valuation higher than biotech giants, Regeneron and Vertex. The Trust has largely refrained from investing in overvalued vaccine companies. Historically, vaccine prices have been put under pressure and additional vaccine companies entering the market have the potential to create a “buyer’s” market, causing additional volatility to share prices.
Fig 1: S&P Healthcare premium/ (discount) to S&P 500 (12m forward P/E) – 30 years*
*S5Health vs. SPX premium/(discount) using 12 forward P/E
Data sourced from Bloomberg
Past performance is not a guide to future performance
On the other hand, the more mature part of the healthcare sector has a valuation that has historically been low when compared to the broader market indices like S&P 500. We have illustrated this with the graph above, using the S&P Healthcare forward P/E multiple.
We all remember the nadir that coincided with the election of President Clinton in the early 90-ties and Hillary Clinton’s plans to fundamentally change the U.S. healthcare system. A similar discrepancy in valuation can be seen coinciding with President Obama introducing the idea of the Affordable Care Act (Obamacare). The recent pre-election debate in the U.S. regarding drug pricing, and the now unlikely possibility of introducing Medicare for All, has resulted in subdued valuations for the healthcare sector. It is our view that the current strong cycle of innovation in the biotech/pharma industry, paired with the increasing demand from an ageing population will continue to drive top line sales and earnings in the healthcare sector in the coming years. The election in the U.S. has been viewed as a risk to the healthcare sector.
The outcome of the election, with the more moderate faction of the Democratic party, represented by President-Elect Joe Biden, is viewed positively for the healthcare sector. Currently the Senate is 50/48 in favour of the Republicans. The remaining midterm election in Georgia, which is to be decided in early January, could result in a split Senate if the Democrats win the remaining seats. In that case, the Vice President Elect Kamala Harris would cast the deciding vote. A split Senate would limit the power of the new government to make big changes to the healthcare system.
The swift development of several Covid-19 vaccines is a great achievement. This will save lives and reduce mortality rates. Economic activity is expected to pick up again and the investment climate will improve just like it has done in the past.