Worldwide Healthcare hopeful on coronavirus vaccine

Mr Borho says that gene therapy is one of the “most promising” sub sectors in this area, and the trust's holdings include gene therapy specialists MeiraGTx (US:MGTX), Sarepta Therapeutics (US:SRPT) and UniQure (Fr:UQ1).  

But the trust's managers have significantly reduced exposure to pharmaceutical companies over the past year. This is because companies that produce generic drugs – copies of an approved brand-name drug – face litigation, and the pricing pressure on drugs is making the sector less attractive. The trust used to invest in Indian generics companies, but has entirely sold out of this sub sector because the US Food and Drug Administration is “breathing down their necks”, according to Mr Borho, making regular inspections and frequently shutting down facilities. He adds that roughly eight out of 10 generic drugs consumed in the US are manufactured in India. 

Although the trust's managers do not choose holdings according to geography, its allocation to Chinese companies has grown in recent years because they think that it offers some of the best opportunities – despite recent headwinds presented by coronavirus. They look to invest in blue-chip leaders in various healthcare sub-sectors that have close ties with the Chinese government and can capitalise on the expected growth of the healthcare industry in China. Examples of such holdings include vaccine company CanSino Biologics (HK:6185) and Jiangsu Hengrui Medicine (600276:SHH), the biggest pharmaceutical company in China, by market value.

But Mr Borho acknowledges that some companies, such as Jinxin Fertility (HK:1951), will be significantly impacted by the coronavirus. He says: “Do people go to a fertility clinic during this time? Absolutely not.” 

Mr Borho adds that in the short term the financial impact of coronavirus is likely to be worse than that of previous viral epidemics such as the zika virus and severe acute respiratory syndrome (Sars). “Normally these things are only short-lived, but I think coronavirus is a little bit trickier – there are still a lot of unknowns, he explains.”

But he is hopeful that CanSino Biologics will be successful in producing a vaccine to help combat the coronavirus. 

A black cloud hanging over the healthcare sector in the US, meanwhile, is the prospect of Bernie Sanders winning the Democratic leadership race, becoming president and enacting his policy of providing 'Medicare for All'. This would result in national healthcare being funded by the state and curtail private sector healthcare investment. But the trust's managers estimate that there is a 1 per cent chance of Medicare for all being enacted and that as soon as it is ruled out there will be a very big rise in sentiment on the healthcare sector "and everything will go up”.

So Mr Borho wants to be ready to increase exposure to the US as soon as the political landscape becomes clearer and buy assets including big pharmaceutical companies. To enable this, the trust's gearing – debt – has been reduced from over 10 per cent at the end of 2019 to around 4 per cent as of 14 February, according to broker Winterflood. This is so that at the given time the trust's managers can draw on it again to fund these purchases. This level of gearing is at the lower end of its historic range – it has typically had a level of around 10 per cent.

Valuations of US equities are a concern for many investors with, for example, the S&P 500 index rising around 25 per cent last year. But Mr Borho is not so concerned about valuations of healthcare shares because, overall, that sector is trading at a 14 per cent discount to the S&P 500 index's overall valuation and a lot of the political uncertainty is discounted in drug prices. Last year healthcare was the second worst performing sector in the US.

The trust fund is overweight Japan relative to its benchmark, which Mr Borho says is an insurance against political headwinds in the US. Its biggest Japanese holding is Takeda (Jap:4502), which completed a £48bn takeover of drugmaker Shire, which had been listed in London, in January 2019. Some analysts think that Takeda spent too much on Shire, but Mr Borho says Takeda is trading at a 50 per cent discount to some of its global large-cap pharma peers. He expects there will be an upwards revaluation of Takeda soon, as institutional investors in Japan become comfortable with the merger and the company has been reporting for longer as a combined entity. 

But Worldwide Healthcare Trust is underweight Europe because Mr Borho says that “innovation happens elsewhere”. However, Switzerland-listed Novartis (Switz:NOVN) is one of his favourite Europe-listed pharma companies because it is “relatively modestly valued, really well run and has lots of cash on its balance sheet which gives [it] options”.

Worldwide Healthcare Trust (WWH)

Source: Winterflood as at 17 February 2020, *AIC, **Frostrow Capital.

Performance

Source: Winterflood as at 17 February 2020

Top 10 holdings (%)

Source: Frostrow Capital, as at 31 January 2020

Sector breakdown (%)

Source: Frostrow Capital, as at 31 January 2020