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Health sector stocks have shown an excellent performance on the stock market since the start of the year. Warren Buffett was not mistaken there, since he invested part of his immense capital in three large pharmaceutical groups: Merck & Co, Bristol Myers Squibb and AbbVie. But the celebration of the successes of research on vaccines against the virus has paradoxically penalized the sector. This may be surprising at first, but the explanation is simple.
Investors are now interested in stocks that will benefit most directly from the decline in the epidemic: cars, banks, leisure. So, is the superb health journey behind us? We do not think so. For many decades, healthcare has experienced strong growth, thanks to the rise in living standards in emerging countries and the aging of the population. And while there is a strong chance that the Covid-19 pandemic will soon be behind us, the health system vulnerabilities highlighted during the crisis will motivate hospitals to purchase effective solutions.
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Health values are not just pharmaceutical values. Software for artificial intelligence diagnostics and hospital management will be in high demand. A study shows that the cost of care for the elderly is doubled by the side effects of the first treatments. In short, one euro of treatment generates around one euro of expenditure to fight against the side effects of this first treatment, often because of the harmful associations between molecules. Older people often take more than one medication. Tabula Rasa, an American company, is working to collect thousands of data across hospitals in order to identify cross-effects and enables hospitals to considerably reduce healthcare costs. The growth of this company is very strong.
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Some investors are also worried about the Democrats coming to power. Joe Biden will probably want to bring down the price of drugs. This argument is valid, but probably overestimated. First of all, the US Senate, still controlled by Republicans, will not allow for any in-depth reform of the health care system.
On the other hand, Joe Biden’s plan to cure more Americans will allow pharmaceutical companies’ sales to grow. Finally, since these fears arose (in 2016, due to the more aggressive program of the Democratic candidate at the time), the valuations of the sector have remained modest. A more voluntary American presidency with regard to the fall in drug prices seems to be largely integrated into stock market prices.
Finally, the pandemic has demonstrated the importance of medical research. And the recent successes of large pharmaceuticals will give them arguments …
Frédéric Rollin, investment strategy advisor at Pictet Asset Management
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