Ian Cowie: ‘brave’ investors can profit from this beaten-up sector

News that a weight-loss wonder drug can also help millions of people suffering from liver disease caused its maker’s share price to surge 6.6% higher on Monday.

Sad to say, investing in healthcare is no guarantee of healthy returns - as illustrated by this particular stock having halved in price over the last year. But investment trusts in this sector can diminish risk by diversification and boost returns by gaining exposure to a wide range of rival businesses.

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Better still, the average share in the Association of Investment Companies (AIC) “Biotechnology and Healthcare” sector continues to be priced 10% below its net asset value (NAV). So, buyers today can still bag bargains among drug funds, despite many stock market indices trading at or near record highs.

Less positively, political risk overshadows this sector after US President Donald Trump signed what he called “one of the most consequential” executive orders in US history. He claimed that pharmaceutical prices would fall “almost immediately, by 30% to 80%”. That hasn’t happened yet but big pharma stocks including the American blue-chips Eli Lilly and Co (NYSE:LLY) and Pfizer Inc (NYSE:PFE), plus the British giant GSK (LSE:GSK) - formerly GlaxoSmithKline - did dip lower in May before staging a partial recovery.

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Most recently, the Danish giant Novo Nordisk AS ADR (NYSE:NVO) received a shot in the arm this week when America’s Food and Drug Administration (FDA) authorised semaglutide injections - marketed as Wegovy and Ozempic - to treat metabolic dysfunction-associated steatohepatitis (MASH) in adults suffering from liver fibrosis.

Martin Holst Lange, the chief scientific officer and head of research and development at Novo Nordisk, said Wegovy was “uniquely positioned as the first and only semaglutide drug approved for MASH, complementing the already proven weight loss, cardiovascular benefits and extensive body of evidence linked to semaglutide”.

He added: “MASH represents a significant health burden, with one in three people [who are] overweight or obese worldwide affected. In the US alone, around 22 million people are estimated to live with MASH.”

NOVO and its rival LLY, which makes the weight-loss wonder drug Mounjaro, are both among the top 10 holdings in Polar Capital Global Healthcare Ord (LSE:PCGH) the £425 million investment trust that leads the AIC Biotechnology and Healthcare sector over the past decade and five-year periods with total returns of 107% and 47% respectively. However, recent difficulties mentioned earlier depressed its one-year “return” to minus 12%.

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Another interesting underlying asset is Intuitive Surgical Inc (NASDAQ:ISRG), which makes the machines for robotic surgery that might eventually replace human surgeons. PCGH pays meagre income of 0.7%, rising modestly by an annual average of 2.7% over the past five years. It is priced at a discount of 3.2% to its NAV.

Worldwide Healthcare Ord (LSE:WWH) ranks second over the past decade but that was largely due to a fund manager who left long ago. Since then, performance has slumped into negative territory over the medium and short terms, with returns of 82% followed by minus 1.2% and minus 9.7% respectively, over the usual three periods.

Top 10 holdings include LLY and ISRG plus the American medical insurance giant UnitedHealth Group Inc (NYSE:UNH), which received a boost after Warren Buffett’s Berkshire Hathaway Inc Class B (NYSE:BRK.B) bought a stake valued at $1.57 billion (£1.15 billion).

Once again, the dividend yield is meagre at 0.73% and shrank by an annual average of minus 0.8% over five years. WWH, which is the biggest fund in its sector with assets of £1.6 billion, is priced 6.4% below its NAV.

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Size is no guarantee of success in this sector - or any other - with the “life sciences” specialist, Syncona Ord (LSE:SYNC), another £1 billion fund, delivering the undesirable hat-trick of negative returns over all three of the usual periods; -23%, -62% and -23% respectively. There are no dividends at all for compensation and it trades at a less-than-mystifying discount of 44%.

International Biotechnology Ord (LSE:IBT), a relative tiddler with total assets of £224 million, is the sector leader over the last difficult year with returns of 75%, 10% and 1.5% respectively. The last performance figure might seem negligible but at least IBT managed to stay positive in a poor 12-month period for pharmaceuticals, aided by its sector-leading yield of 4.8%, rising by an annual average of 5%.

Big pharma gets a bad press and has been targeted by populists eager to surf public cynicism. But it won’t be journalists or politicians who find a cure for cancer, another vaccine for Covid or just a way to help us eat less.

For good or ill, President Trump, aged 79, is not immortal although it might sometimes feel that way. Biotechnology and healthcare investment trusts, which currently look somewhat sickly, could offer bargains for brave long-term investors.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Eli Lilly, Pfizer, Novo-Nordisk and Worldwide Healthcare as part of a globally diversified portfolio of investment trusts and other shares.