The weight loss drugs market has been dominating the headlines of late, with manufacturers Novo Nordisk and Eli Lilly the almost unassailable darlings of the stock market when it comes to the healthcare sector.
The drug manufacturing duo have been riding high in recent years on the back of their products’ success.
The two firms have however seen their prices slip over recent months, with disappointing sales data the main culprit for the downturn.
Investors might be wondering if their portfolios are over exposed to the weight loss drug market – although experts say the fundamentals of these companies look robust, and high price to earnings ratios indicate investors expect further growth.
Nevertheless, it is always wise to avoid putting all of your eggs in one basket.
With Novo and Lilly expected to maintain their stranglehold on the weight loss drugs market for the foreseeable, many healthcare investors will find that their fortunes are tied to the future performance of these companies’ products.
But the healthcare sector is large, stretching far beyond the high-profile bubble of weight loss drugs. Of course, these drugs are an important development, especially given the increasing prevalence of obesity around the world, but they also aren’t the only cogs integral to the healthcare sector.
Drug development: Significant progress has been made in treatments for cancer, ADHD and schizophrenia
Dan Coatsworth, investment analyst at AJ Bell, said: ‘All the excitement around weight-loss drugs would suggest it’s the only thing that matters in healthcare. While this area is incredibly important, there is also a lot going on elsewhere.
‘The sector can be high risk as it’s hard to predict the success of drug trials, meaning it is better to take a diversified approach via a fund or investment trust than trying to pick individual stocks.’
While investors might be wise to expand their portfolios to other parts of the sector, the future of the weight loss market could still be promising.
Coatsworth said: ‘There is the potential to have a drug on the market that not only tackles obesity but also helps to reduce alcohol or substance use, and even used on a wider basis such as potentially helping to prevent dementia and improve cognitive function in people with Alzheimer’s disease.’
Healthcare services
The Baronsmead Venture Capital Trusts invest heavily in the healthcare sector, with healthcare and education making up a combined 21 per cent of its portfolio.
And yet, the trust steers clear of drug-development-focused firms due to the uncertainty of outcome involved.
Ken Wotton, manager of the Baronsmead VCTs at Gresham House, told This is Money: ‘Healthcare is a core focus sector for Baronsmead. Within this broad sector we are careful to be very selective.
‘We avoid high-risk drug development opportunities, often burning cash for many years and reliant on binary regulatory approvals.
‘Instead, we prefer to pursue healthcare services opportunities that are at or close to profitability and can deliver a lower-risk growth trajectory supporting more consistent investment returns.’
The healthcare services sector sees companies benefit from the pharma giants leading the way in drug development, without becoming exposed to the uncertainty themselves.
Instead, these firms are focused on developing and delivering technology and products to drug development firms to aid them in their discovery process.
Wotton said: ‘A key theme within the healthcare sector is a trend towards outsourcing of specific elements of the drug discovery process by large pharmaceutical companies.
‘Specialist providers of services, technology and data and help their customers derisk, accelerate or enhance the expensive process of delivering a new commercially viable drug.
‘This area is potentially attractive, benefiting from structural tailwinds in spend with a lower risk business model than some other areas of the sector.’
Medical technology is advancing
With the rise of AI in recent years, there is growing opportunity in the technology sector as firms leverage the power of these new tools within the medical sector.
Baronsmead points to Ixico as a lower-risk firm capitalising on the emergence of artificial intelligence. Ixico is part of Baronsmead’s investment portfolio.
Wotton said: ‘Ixico applies AI technology to the neuroimaging process to improve the effectiveness and efficiency of clinical trials focused on developing therapies for central nervous system conditions such as Alzheimer’s and Huntingdon’s Disease.’
Shares in the London-based firm have suffered in recent years, however the firm recently booked an order worth more than £5million, bringing its order book to almost £15million by the end of the year, while its loss is expected to narrow.
Among more traditional med tech players, another Baronsmead investment, Bioventix, creates antibody technology that firms can use for testing and research purposes, selling it on a royalty basis.
Nicholas Midgley, senior equity analyst at St James’s Place, says Danish firm Coloplast has carved a strong niche in the medtech sector.
He told This is Money: ‘Coloplast, has long been Europe’s med-tech champion, but a huge injection of R&D investment by ConvaTec, Coloplast’s leading competitor in ostomy and continence products, has led to considerable advances in the quality and comfort of simple items such as catheters.’
Drug development can still provide opportunities
While drug developers do present a higher risk than other parts of the healthcare sector, they also present considerable opportunity.
The key is to ensure that exposure to companies operating in this area is not concentrated in one single area.
Coatsworth told This is Money: ‘Big pharma companies face the problem of patents expiring on their blockbuster treatments, leading to rivals offering copycat products at much cheaper prices.
‘That puts pressure on pharma giants to always have a pipeline of treatments that could be future major products, either through work in the laboratory or through acquisitions.’
Being overly exposed to the weight loss sector might not be a wise move, but having these firms as part of a balanced portfolio is perfectly reasonable.
However, within drug development there are other areas that could prove promising investment opportunities.
Ailsa Craig and Marek Poszepczynski, portfolio managers at International Biotechnology Trust, said: ‘Approximately 20 per cent of our holdings are dedicated to innovative CNS (central nervous system) therapies targeting conditions with significant unmet medical needs, such as schizophrenia and ADHD.
‘With improved biological understanding of diseases affecting the brain, a new generation of more efficacious and safer drugs have emerged.’
Firms like Intra-Cellular Therapies and Supernus Pharmaceuticals are leading developments in these areas.
Supernus shares have gained some 60 per cent over the past five years, while Intra-Cellular shares have surged almost 740 per cent
Craig and Poszepczynski added: ‘Intra-Cellular Therapies is making significant strides with its lead product, Caplyta, which has gained regulatory approval for treating schizophrenia and bipolar depression.
‘Caplyta’s unique mechanism of action sets it apart from traditional antipsychotics, providing better tolerability and a reduced side effect profile, such as less weight gain or movement disorders.’
Supernus’ Qelbree therapy is also ‘carving out a market share’ as a result of delivering a better side effect profile than competitors.
SJP’s Midgley also points out that there have been considerable advances in treatments for diseases like HIV and cancer.
He said: ‘In oncology, the work of harnessing the immune system to defeat cancer is ongoing, while long-acting HIV drugs are now not only highly effective but also mean that sufferers only need to visit the doctor every six months, improving compliance and reducing reminders of the disease.’
According to Craig and Poszepczynski, cell therapy developments for the treatment of leukeumia, lymphoma and melanoma are creating significant opportunities within oncology.
They said: ‘Iovance Biotherapeutics recently launched its tumour-infiltrating lymphocyte (‘TIL’) therapy, lifileucel, for advanced melanoma.
‘This represents a new frontier in immunotherapy, particularly in the treatment of solid tumours, and the drug is currently in late-stage trials for the treatment of lung cancer.’
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