Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about opportunities in the global healthcare sector with Andrew Wallman, a partner at EdgePoint Wealth Management. We talked about GLP-1 drugs, demographics, and valuations. And we started by asking how he balances the two sides of the healthcare profile: defensive, yet growth-oriented.
Andrew Wallman (AW): One of the interesting elements of the healthcare sector is that the underlying components have various exposures like growth or defensive. In terms of the defensive, where economic business activity can change dramatically year to year, spending within healthcare tends to be stickier and a lot less volatile. If you need a prescription because you have an ailment, you go get a test to figure out what it is, and you get that ailment taken care of. If you want to buy a new car, well, how the economy is performing is probably a big part of whether or not you’re going to buy a car. So historically, healthcare has been less exposed to the business cycle. You can certainly find businesses that have a more defensive element. You can find businesses that are on the leading edge of innovation. But what we like is that healthcare in general is an industry defined by resilience. It’s companies that operate within high barriers to entry, that are shaped by regulation and specialized expertise, and many of them run capital-light models that don’t require heavy reinvestment to grow. These fundamentals have always made healthcare an attractive long-term allocation.
Demographics
AW: One of the fastest growing segments of the population is adults over the age of 65. And those aged 100 and above now represent the fastest expanding cohort of all. Why that’s important is because, as we age, we tend to consume more healthcare products and services. But it’s not linear, it’s exponential. So, as you get older, you consume exponentially more healthcare products and services. That is a massive tailwind to the healthcare space.
Names he likes
AW: We like a business like a Thermo Fisher, a cornerstone of the life science industry, much the way that Home Depot would be to home renovation. This is a company that offers an end-to-end solution for scientific labs, providing both distribution and manufacturing of lab equipment, bioprocessing tools and other essential products. So, 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.
Another company that we’ve recently added to the portfolio is Revvity, carved out of the near century-old PerkinElmer, a high-growth, high-margin life science and diagnostic business, rebranded as Revvity. The company now operates two segments — life sciences and diagnostics — and is pursuing several meaningful growth opportunities. For instance, Revvity does the blood tests for newborn babies, the heel prick test. And all states and countries have different levels of testing. Some have very little testing. Some have 60 tests that they perform on a newborn baby. And we think as more and more countries adopt this kind of testing, it will be very beneficial to Revvity’s business.
An area where we think we are buying growth for free within the healthcare space, would be Roche, a Swiss multinational healthcare company specializing in pharmaceuticals and diagnostics Recently they’ve had some high-profile drug trials fail, and so they’ve lost their premium valuation because the market doesn’t think their R&D spend has been efficient. We see a business change occurring at Roche, a change in capital allocation, shifting from investment to harvesting, which means they’ll be more focused on commercializing existing drugs in the pipeline. We also think there’s an industry change happening that will benefit Roche. AI is revolutionizing drug development, and they’ve been an early adopter in the healthcare space. And then, last but not least, there’s a new CEO who’s driving an operational focus. So, we think there is some positive changes happening at Roche that the market is not appreciating today.
How valuations are holding up
AW: Valuations in this sector are unusually attractive. 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. This disconnect exists largely because investors are facing a cluster of uncertainties all at once. Part of the challenge is the entire industry is going through a Covid hangover. The pandemic led to a surge in spending in healthcare. Now the industry is coming off a couple years of declining revenue. In addition, in the U.S., we have a new administration who’s reshaping expectations around drug pricing, reimbursement, funding rules, exclusivity windows, and, of course, tariffs. And all of these elements make it difficult for investors to understand the underlying economics of the business. But that is the opportunity.
And finally, what’s the bottom line for healthcare investors in the current moment?
AW: The healthcare sector represents a tremendous opportunity in terms of the quality of the businesses and the secular tailwinds that will benefit this sector for years to come. High barriers to entry, regulatory barriers to entry, specialized expertise, structural demand that creates an enduring tailwind, and capital-light models are all the positives of the businesses we find in the healthcare space. These fundamentals have always made healthcare an attractive part of a diversified portfolio, and the demographic backdrop strengthens that case even further.
Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Andrew Wallman of EdgePoint Wealth Management. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
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