Spiralling government bond yields, disappointing domestic growth, inflationary concerns and uncertainty over Trump’s return to the White House is setting the scene for heightened stock market volatility.
As an essential service, the healthcare sector is relatively resilient. It’s also an area that’s benefitting from structural and demographic growth drivers. But it’s an area of technical and regularity complexity, as well as political pressures.
Here are three companies we think are well placed to capture the opportunities and navigate the risks in this innovative industry.
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AstraZeneca – strength in depth
AstraZeneca looks set to deliver a strong set of 2024 numbers after it raised guidance again in its third-quarter results.
The group’s expecting underlying revenue growth in the high teens, which underpins analyst forecasts of $53bn for the year. This marks good progress towards a revenue target of $80bn by the end of the decade which leaves significant slack for the rate of growth to slow.
There’s a strong outlook for existing medicines as well as the pipeline of potential new products, which is an area where Astra's hit rate in the clinic has been impressive. Continuing success in drug approvals will be needed to offset the potential loss of revenue from patent expirations over the coming years. But the high-risk nature of drug discovery means there’s no guarantee this will continue.
The recent withdrawal of its application for approval of lung cancer treatment Dato-DXd in the EU is one example of the potential for disappointment. But on balance we think Astra is well placed to meet or beat its 2030 targets. Cancer treatments, where the group remains a thought leader, are still a key focus.
The group is also enjoying high growth in other disease areas.
The hefty research budget is supported by a robust balance sheet and strong cash flows, meaning there should also be enough left over to underpin the 2.4% dividend yield.
Investor nerves have been put on edge, following the launch of investigations by the Chinese authorities into the business practices of current and former employees.
We believe the market reaction has been somewhat overdone and could represent an opportunity to gain exposure to a quality name in the sector. However, until more clarity emerges from China, more up and downs are likely.
Novo Nordisk – more to run in the anti-obesity boom
Novo Nordisk’s revenue and profit growth in recent years has been outstanding.
The key driver of this success is its range of GLP-1 injections for the treatment of type 2 diabetes (Ozempic) and, more controversially, as a weight-loss aid (Wegovy).
The market opportunity for this new generation of obesity treatment has the potential to support strong growth for many years – particularly as more use cases emerge for the treatment of associated medical conditions like osteoarthritis and liver and kidney diseases.
Recent late-stage clinical data has given management the confidence to target an application for approval in certain liver conditions in the first half of 2025.
These attractions haven’t gone unnoticed by the rest of the market.
US giant Eli Lilly is the main source of competition currently, and a host of other names are entering the race to develop new therapies. But the first-mover advantage held by Novo and its arch-rival looks very difficult to overcome.
Novo already has one eye on bringing out its next generation of products in the space. Its progress is being eagerly followed by the market which reacted very negatively to disappointing data from the late-stage trial for its experimental drug CagriSema.
There’s still potential for this to become a commercially viable product and there are other candidates in the pipeline. The prospect of an oral formulation of semaglutide (the active ingredient in Ozempic and Wegovy) is one we’re excited about, but there are still some challenging hoops to jump through before this becomes a reality.
Manufacturing constraints have proved to be a brake on growth, but there are some signs that investment in capacity is starting to have the desired effect.
Despite the market reaction to the CagriSema trial, the valuation remains at the upper end of the peer group, a position we think is merited by the superior growth outlook. But that does leave the shares vulnerable to disappointments.
Primary Health Properties – primary care boom
Primary Health Properties (PHP) has long been a favourite among income-seeking investors, and it’s not hard to see why. The group’s portfolio of purpose-built doctor’s surgeries has delivered an impressive 28 consecutive years of dividend growth.
As a real estate investment trust (REIT), PHP is required to distribute most of its profits as dividends, making it an attractive option for those looking for a steady income stream, though nothing is guaranteed.
PHP’s strategy to focus on maximising value from existing properties, rather than pursuing new developments, is a prudent move in the current environment. Elevated costs and limited new supply are giving landlords like PHP more leverage, enabling them to negotiate better rental terms.
With 89% of PHP’s rent roll backed by the NHS or its Irish equivalent, and an average lease length of 10 years, the group’s income streams look robust.
Recent rent increases for existing tenants have been the key driver of rental growth, helping PHP navigate the challenging interest rate environment. However, hopes for near-term rate cuts are starting to fizzle out.
We’d been expecting rate cuts to drive property values higher and stimulate more activity, but with those expectations fading, PHP’s valuation has felt the impact.
Looking ahead, PHP is well-positioned to benefit from the growing demand for primary care facilities driven by an ageing population and the NHS backlog. Ireland is still a promising growth area, offering longer leases and potentially more favourable market dynamics.
We think PHP’s ability to offer a more stable income makes it a compelling option for long-term investors. But exposure to interest rates and question marks around growth beyond rent reviews are both near-term risks.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Investments rise and fall in value so investors could make a loss.
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