While blockbuster obesity drugs have dominated news headlines this year, ground-breaking innovations are taking place across the healthcare sector and catching the attention of investors.
Darius McDermott, managing director at FundCalibre, highlights the seismic advancements shaping 2024:
“We’re witnessing a revolution in the treatment of obesity, with the NHS now starting trials of weight-loss drug Mounjaro. In the same week, scientists announced progress on a vaccine for ovarian cancer. There is also real progress on areas such as Alzheimer’s and mental health drugs.”
The financial rewards for these breakthroughs can be extraordinary. Novo Nordisk’s obesity treatments have catapulted it to become Europe’s largest listed company, with Wegovy sales alone generating 11.7 billion kroner (£830 million) last quarter. Meanwhile, Moderna reaped $36 billion from its COVID-19 vaccine.
Healthcare looks to be entering a golden age, driven by demographic shifts that look capable of driving growth for years, if not decades, to come.
However, while innovations like GLP-1s have taken centre stage, investors may be overlooking a wealth of untapped opportunities emerging in other corners of the healthcare industry.
UK technology stocks drive healthcare innovation
The UK has long been a leader in healthcare innovation, from pioneering vaccinations to transforming genomics. This expertise is reflected in the FTSE 100, where healthcare boasts the largest sector weighting.
However, the real growth story may lie beyond the large-cap giants. Opportunities are emerging among small and mid-sized players, particularly within the UK’s Alternative Investment Market (AIM).
Agile players are capitalising on the vast budgets of pharmaceutical giants without shouldering the scientific and regulatory risks of drug development, according to Ken Wotton, manager of the Baronsmead VCTs:
“A key trend in healthcare is the outsourcing of specific elements of drug discovery process by large pharmaceutical companies. Specialist providers of services, technology and data help de-risk, accelerate, or enhance the expensive process of developing a new commercially viable drug.”
“Biotechnology company Bioventix develops specialist antibody technologies that can be used in diagnostic testing and laboratory research. Its royalty-based model generates exceptional profit margins and cash flow as the business scales.
“We also hold Diaceutics, a diagnostic commercialisation business, has developed its own proprietary data platform, providing access to a network of laboratories and their diagnostic testing data. Via multi-year contracts, Diaceutics partners with global pharmaceutical leaders to bring precision medicine diagnostics to market.
“Another example is Ixico, which applies artificial intelligence to improve the neuroimaging process, enhancing the efficiency and effectiveness of clinical trials for therapies targeting central nervous system conditions such as Alzheimer’s and Huntington’s disease.”
Breakthroughs in biotechnology
New scientific and technological advances are fuelling a wave of innovation in the biotechnology sector, with transformative drugs reshaping the future of medical treatment for a wide range of conditions.
Ailsa Craig and Marek Poszepcynski, portfolio managers at the International Biotechnology Trust (IBT), highlight the investment potential within central nervous system (CNS) therapies:
“With improved biological understanding of diseases affecting the brain, a new generation of more efficacious and safer drugs have emerged. Within the US, leading companies in this space include Intra-Cellular Therapies and Supernus Pharmaceuticals.”
Approximately 20% of IBT’s portfolio focuses on CNS treatments addressing unmet needs in areas like schizophrenia and ADHD. The managers highlight Intra-Cellular Therapies and Supernus Pharmaceuticals and key players in the space:
“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. This versatility positions Caplyta as a “pipeline in a drug,” with ongoing studies exploring its potential in other neuropsychiatric conditions, including major depressive disorder.
“Supernus Pharmaceuticals is another key player, primarily focusing on ADHD and epilepsy. Its non-stimulant ADHD therapy, Qelbree, is carving out a market share thanks to its favourable side effect profile compared to stimulant alternatives.”
Three fund picks for broader healthcare exposure
Investors will almost certainly have exposure to the major pharmaceutical companies, wherever they invest. Alongside Novo Nordisk, Novartis and Roche are major constituents for the MSCI Europe ex-UK index.
Investors wanting more than just Novo Nordisk and a handful of its heavyweight peers will have to look a little harder, finding active funds with higher holdings in healthcare, McDermott argues:
“Funds such as the Comgest Growth Europe ex UK fund, for example, have a far greater weight, with around a third of the portfolio in healthcare. It holds Novo Nordisk, but also more eclectic names, such as Swiss manufacturing group Lonza, which focuses on the pharmaceutical, biotechnology and nutrition sectors. The Comgest fund also holds contact lens maker Alcon, plus dental implants specialist Straumann and biopharma equipment maker Sartorius Stedim. This means it comes at the healthcare theme in a variety of different ways.
“Another differentiated pick is the IFSL Evenlode Global Income fund, which has around 20% in conventional healthcare companies, but also invests in Shimano. This Chinese company manufactures cycling components, with a sideline in fishing tackles. Manager Ben Peters says China has seen a surge in the popularity of cycling generally, and in road-bikes specifically, as fitness becomes a priority. The company sells all over the world.
“For pure healthcare exposure, and for exposure to areas such as biotechnology, there are specialist options such as the Polar Capital Global Healthcare Trust. This has around 28% in pharmaceuticals (a significant underweight versus its index) and around 20% in biotechnology. It also has another 14% in healthcare equipment.”
