Healthcare trusts have endured a bruising few years. 

That comes as a painful period for this part of the market has been exacerbated by specific issues at many investment trusts which buy health and drug development companies. 

The Association of Investment Companies’ Biotechnology & Healthcare sector is down 15.2% over five years, including an 8.8% average loss in the last 12 months, in terms of shareholder total return. Yesterday, the mean share price discount to NAV stood at a double-digit 14%.

The biggest drag has been Syncona (SYNC ), once the sector darling, which in June unveiled a strategic review floating the option of a managed wind-down.

Bellevue Healthcare (BBH ) has also faced a crisis, shrinking to a market value below £150m as its annual redemption facility and a share buyback programme proved too tempting for many investors. 

This year has been particularly ‘rough’, as Darius McDermott, managing director at Chelsea Financial Services, put it. He noted the second quarter marked ‘the sector’s worst-ever relative quarter versus the S&P 500, pushing valuations to levels only seen three times in the past 35 years.’

But those depressed valuations are now drawing investors back. 

Eying up the opportunity, Quilter Cheviot’s Billy Ewins said: ‘Healthcare as a sector is in an unusual but unique position today.  Sentiment is as poor as we’ve seen it in a decade with healthcare in the MSCI World index sitting at its lowest weighting for over 10 years, but the fundamentals are as strong as ever.’

 The fund analyst said his research suggests the sector could deliver around 17% earnings growth this year.

‘But it’s actually trading at close to a 20% discount to the wider market, and that’s the cheapest relative valuation in almost 40 years,’ said Ewins. 

‘I think that combination of strong growth, depressed sentiment, and those cheap valuations set it up really quite attractively.’

What are the risks?

Possible cuts to the National Institutes of Health (NIH) and controversial appointments at the Food and Drug Administration (FDA) were the big threats at the start of the year, exacerbated by projections of 200% tariffs on pharmaceutical products in April. 

On top of that, of course, was Donald Trump’s move to appoint vaccine sceptic Robert F. Kennedy Junior as US health secretary. 

‘For any kind of healthcare or biotech investor, it’s a difficult environment when there’s so much regulatory uncertainty,’ said Winterflood investment trust analyst Shavar Halberstadt. 

In International Biotechnology Trust (IBT ) manager Ailsa Craig’s view, the situation ‘feels a bit less scary than it did in April’.

On the NIH, she said: ‘When you scratch the surface, it doesn’t look like those cutbacks should hit real innovation’. Craig noted efforts thus far seem to have been aimed at reducing ‘waste’ in areas where spending has ballooned unnecessarily. As an example, she pointed to the ‘huge budget’ for infectious disease research, which ‘may have been a bit of an overreaction after Covid’.

Craig was also positive that ‘controversial appointments’ at the regulator don’t look like ‘much of a risk anymore’. 

Going further on the FDA front, RTW Biotech (RTW ) manager Woody Stileman said: ‘There’s a good chance it will be even more efficient in the years ahead.’

He brought up a recent tweet from RFK Jr with the hashtag ‘MABA’ or ‘make American biotech accelerate’ – an indication of the health secretary’s commitment to US leadership in the sector as part of his ‘make America healthy again’ agenda. 

In terms of possible tariffs, he added that ‘the S&P Biotech Index was up on the announcement and rose 3% the next day, suggesting the market is already comfortable with that risk’ – though the outcome for larger pharmaceutical companies is less predictable. 

A tough five years 

There are tentative signs sentiment may be turning on healthcare companies, including a stronger run for many health and biotech trusts in recent weeks. Since the April low, the S&P Biotechnology has slightly outperformed the S&P 500. 

However, the longer-term index performance figures make clear how much ground there is to make up before calling a comeback. For sterling investors, the MSCI World Healthcare index has returned 26.5% over five years, while the Nasdaq Biotechnology index is up 17.8% – both far behind broader global markets, given the MSCI World’s 82.5% return. 

One problem identified by investors in the sector is that healthcare investing boomed in 2020 during the Covid pandemic, helped by rock-bottom interest rates. That probably led to too many small companies in the sector getting funding, trapping capital and talent, even if they did not have good drug development prospects – a trend which has created issues a few years down the line.

Trump’s most recent interference has been around drug pricing. In the past few months, the President has called on the healthcare sector to set ‘most favoured nation’ (MFN) price targets to cap US drug prices at the lowest price paid in comparable developed countries.

‘I think that is probably the risk that is still most uncertain,’ said Stileman. ‘It’s not exactly clear what Trump means by this approach, or what would be a victory for the administration.’

However, he added there are scenarios in which biotech companies might avoid the worst effects.

‘One is to cut out the middlemen. The insurers, the pharmacy benefit managers and so on. They take a huge portion of the actual price of getting a drug to patients and if you cut that down, prices to patients will be lower.’ Pfizer and Bristol Myers recently took a step in this direction with their direct-to-consumer strategy for blood thinner Eliquis. 

Another option, Stileman said, is ‘global price rebalancing’, as seen already with Eli Lilly raising European prices to allow reductions in the US.

In McDermott’s opinion, ‘greater clarity’ on the issue of US drug pricing is ‘a key catalyst’ that ‘could trigger a marked shift in sentiment.’ 

‘But even without an immediate policy tailwind, the risks appear more than priced in,’ he said.

McDermott argued that ‘with long-term drivers such as ageing demographics and rising emerging-market demand still firmly in place, as well as strong innovation pipeline in the near-term, current valuations present an attractive entry point’.