(Runtime: 6:00. Read the audio transcript.)
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Valuations in the healthcare sector are unusually attractive after a series of disruptions caused investors to exit the field, says Andrew Wallman, a partner at EdgePoint Wealth Management.
Speaking on the Soundbites podcast, Andrew Wallman said one or two issues might have been “manageable” but a combination of four or five simultaneous disruptions caused some institutional investors to pull back.
“Risk compounds when uncertainty multiplies and market participants often choose not to engage at all,” he said. “But that is the opportunity.”
He said investors who can focus on companies with good fundamentals and pricing power may benefit from cheaper valuations.
“Relative to the broader index, healthcare is among the cheapest it’s ever been. And even relative to its own history, the sector now trades roughly around bottom quartile valuations,” he said.
Disruptions facing the industry started with a “Covid hangover” coming out of the global pandemic. A surge in healthcare spending gave way to years of declining revenues.
On top of that, the Trump administration in the U.S. reshaped expectations around drug pricing, reimbursement, funding rules, exclusivity windows and tariffs.
“All of these elements create uncertainty,” he said. “Investors are facing a cluster of uncertainties all at once.”
Wallman sees the industry as heterogeneous and resilient.
“Where economic business activity can change dramatically year to year, spending within healthcare tends to be a lot stickier and a lot less volatile,” he said.
Growth is found in the adoption of AI-driven efficiencies and demographics.
“As people age, healthcare consumption doesn’t simply rise, it accelerates exponentially,” he said. “That structural demand creates an enduring tailwind across the ecosystem, from diagnostics to biopharma to life sciences.”
Among the names he likes are:
- Thermo Fisher, offering lab equipment, bioprocessing tools and other essential products to healthcare providers. “Rather than making a bet on one particular company doing well, you can make a bet that as the healthcare companies do well in general, Thermo Fisher will be there to sell more products and services.”
- Roche, a Swiss multinational healthcare company specializing in pharmaceuticals and diagnostics. After some high-profile drug trial failures, the company lost its premium valuation. But Wallman sees a shift in capital allocation, early AI adoption, and new operations-focused leadership.
- Revvity, carved out of the near century-old PerkinElmer in May of 2023. It focuses on life sciences and diagnostics, and stands to benefit from the growing adoption of newborn blood testing.
“The healthcare sector represents a tremendous opportunity in terms of the quality of the businesses in the sector and the secular tailwinds that will benefit this sector for years to come,” Wallman said.
Regulatory barriers to entry, specialized expertise and capital-light models are all seen as positives.
“These fundamentals have always made healthcare an attractive part of a diversified portfolio, and the demographic backdrop strengthens that case even further.”
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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.