In the last 12 months, shares of the Australian S&P/ASX 300 healthcare index (comprising 22 companies) have risen faster than their counterparts in the industrials and energy sectors. While this is in part caused by the downturn in the commodity markets as the world grapples with the European debt crisis and a slowdown in China, the healthcare group, notoriously a defensive sector, has also shown resilience despite challenging market conditions.
Among the top performers in Australia for the financial year 2012 were medical products maker ITL, biological storage provider Cryosite and drug maker Antisense Therapeutics. Their shares rose 179%, 147% and 125% respectively. ITL’s recent improvement can be attributed to the sale of its Malaysian distributor for $1.1 million and completion of a debt restructure. Cryosite recently announced an expected net profit of about $1 million, up from $330,000 a year ago, and Antisense Therapeutics, which develops and markets drugs for treatment of diseases like psoriasis, multiple sclerosis, autoimmune and cancer, was recently granted a Japanese patent covering the use of the growth hormone-receptor targeting-drug, ATL1103, until February 2024.
This has allowed the company to enter into a potential licensing agreement with an international pharmaceutical company. Among the majors, CSL was up 56% in the past year, Cochlear gained 54% and ResMed 36%.
According to PwC, its Australian Life Sciences Index, which measures the share performance of medical devices makers and companies in the pharmaceutical and biotechnology sector, gained 2.4% in the three months to June this year. This compared with a decline of 6.4% in the All Ordinaries Index as gains in CSL, Cochlear, and Resmed, helped to offset declines in smaller companies. By comparison, the NASDAQ Biotech Index also outperformed the local markets in the U.S. and the NASDAQ Composite, ending the quarter with a 5.5% gain.
Australia is among the leading location for biotechnology companies in the Asia-Pacific with over 1,000 biotechnology companies and (450 therapeutics and diagnostics and 600 – 1,000 medical technology companies). According to industry group AusBiotech, longer life expectancies, a rising global population and demands for a cleaner environment have led to three emerging growth sectors –‘Medtech’, ‘Foodtech’ and ‘Cleantech’.
The medical technology industry (Medtech) has been growing rapidly domestically and globally, with increases believed to be the result of the growing affluence of developed and developing countries, and a concomitant rise in life expectancy, placing greater demand for a better quality of life. In Australia, demand for medical devices is fuelled by an ageing population – by 2050, over 30% of the population will be over 65 years of age. The two biggest states, Victoria and New South Wales, are considered the established Medtech communities, with ResMed and Cochlear dominating the market.
The food technology (Foodtech) industry has also seen substantial growth, due to three factors: growing concern amongst consumers over debilitating and chronic illnesses, and efforts to prevent those illnesses; emerging food sustainability concerns given that by 2050 the world’s population is projected to reach 9 billion; and the simple fact of our being able to genetically modify staple foods.
No less important (although slower growing) is the environmental technology industry (Cleantech), which focuses on producing technologies to address environmental issues, including renewable energy, water purification and biofuels. With Australia’s recent commitment to reducing carbon emissions and Japan’s recent announcement that it will eliminate nuclear power by the end of the 2030s, Cleantech is expected to continue to grow in the future.
In the global market, major drug and healthcare product companies have also shown resilence. Pfizer, the world’s biggest pharmaceutical company, has seen its shares rise almost 48% in the last year, Bayer was up more than 60% and Glaxosmithkline gained 15%. Competition for the next new product is so intense that companies including Johnsons and Johnson, Sanofi, Pfizer and Merck & Co., are setting up R+D centres close to academic and research communities to search out potential early-stage acquisitions. Johnsons and Johnson, which has made nine acquisitions over 12 months, is said to have joined with Index Ventures and GlaxoSmithKline earlier this year to form a $200 million fund to invest in early biotechnology.
Among successful IPOs this year was the listing of IHH Healthcare Bhd. (IHH), the world’s second-biggest health-care provider by market value. While IHH isn’t a biotechnology company, key to its growth is to acquire and develop hospitals, capitalising on populations, primarily in Asia, that are becoming richer and demanding better care. Controlled by Malaysian state investment company Khazanah Nasional, the company plans to add 67% more hospital beds by 2017.
Along the theme of Foodtech, fund manager Deutsche Asset Management spoke on Fundsupermart that he is positive on fertilizer companies, food retailers and supply chain managers, biotechnology and modified seeds companies. Skye Macpherson, a portfolio manager of global resources at First State Investments Hong Kong, believes that the demand growth for agricultural commodities is underpinned by population growth and improving incomes in developing nations.
But there are reasons to move cautiously in biotechnology. While hospitals and health-care providers are lower beta (a measure of volatility) stocks, biotechnology is a field fraught with pitfalls. While news about patent approvals or a marketing license may send share price soaring, the risks include product failures, lack of a commercial markets, a shortage of funding, regulatory and patent hurdles. Discoveries also take years to translate into marketable products.
The advice for investors is that they should spread their bets, a strategy that makes the field ideal for funds. As the Australian Stock Exchange says on its website: “share market performance figures for the sector both here and in the U.S. indicate the importance of adopting a portfolio investment approach across the sector to reduce risk, while retaining exposure to high growth companies. Another option may be to invest in a listed investment company (LIC) that itself invests in a portfolio of companies.”
Lincoln Gomes, PhD, contributed to the story.
Bee Lin Ang is a writer and blogger based in Sydney. She was a former editor with Bloomberg News in Hong Kong and spent 10 years as a correspondent with Reuters in Singapore, London and Melbourne, specialising in Asian equities and commodity markets. She is fluent in Mandarin and speaks various other Asian languages.