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Generating wealth from health – 3 share ideas

We take a look at three share ideas that could prosper in the healthcare space.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Global healthcare continues to grapple with its biggest crisis in living memory. Successful vaccine programs have materially blunted the immediate threat of Covid-19. However, the pandemic has left an unprecedented backlog, not just in elective care procedures, but also in more life-threatening scenarios.

It could take until 2027 in England to clear the backlog in cancer treatment and at least 30,000 people in May were still waiting for cancer treatment to start. Drug development timelines were also heavily set back as clinical trials were cancelled or postponed.

The sector’s attractions include exposure to long-term demographic trends like growing populations and increasing life expectancies. Complex regulatory regimes and technical complexity often result in high profit margins and daunting barriers to entry.

In the US for example, patents provide drug producers with 20 years of protection from the date of granting (which can be before approval). Companies who develop therapies for rare or ‘orphan’ diseases can enjoy further protections and incentives, and have been able to charge very high prices.

But this comes with lots of risk and costs. Expected US legislation (already ratified by the Senate) means the pricing of new therapies, as well as price rises on existing approved treatments, will come under pressure. This will have wide implications in what is by far the world’s largest pharmaceutical market.

Typically, drugs take at least ten years to develop and these costs can push into the billions. Further, most drugs that make it through pre-clinical evaluation never reach approval.

Blockbuster drugs can be highly lucrative, generating billions of dollars over their lifetime. In 2019, the pharmaceutical industry spent $83 billion dollars on research & development (R&D), a tenfold increase in real terms per year when compared to the 1980s. More mature portfolios are seeing patents approach expiry and face competition from generic drug producers. The majors are under pressure to refill the hopper, either through in-house development, licensing deals or mergers & acquisitions.

In an environment where investor appetite to fund clinical trials is waning, companies with strong cash flows and/or balance sheets with diverse development portfolios should be best placed. With that, here’s a closer look at three share ideas that could benefit in the healthcare space.

This article isn’t personal advice. If you’re unsure if an investment is right for you, seek advice. All investments can go down as well as up in value, and you could get back less than you invest.

Investing in individual companies isn't right for everyone. That's because it's higher risk, your investment depends on the fate of that company. If that company fails, you risk losing your whole investment. If you cannot afford to lose your investment, investing in a single company might not be right for you. You should make sure you understand the companies you're investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.

Jazz Pharma

Ireland’s Jazz Pharma hit the headlines with last year’s $7.2bn acquisition of GW Pharma, a UK based pioneer of licensed cannabis derived therapeutics.

At the half year mark, Jazz saw revenues grow 24% to $933m. That was dominated by its sleep disorder franchise, which focuses on excessive daytime sleepiness.

Underlying net income was up 27% to $305m and cash conversion was strong, with operating cash flows of $512m in the first half. Jazz is making a dent in its net debt pile, which is down 8% since the end of 2021 to $5.4bn.

The cannabidiol products which are primarily prescribed to combat seizures in several conditions, made up under 20% of sales. But with a total of ten new market and indication launches across 2022, they‘re well poised to accelerate.

Jazz also has a rapidly developing cancer franchise, with two products launched since 2020. Between them these products grossed $141m of revenues in the second quarter.

Jazz has recently received approval from the US FDA (Food and Drug Association) to progress its early-stage candidate into first in human trials. This is a novel treatment and has the potential to benefit cancer patients with high unmet needs in multiple different solid tumours.

Jazz has a deep pipeline of investigational programs, including seven in phase three (the final hurdle to be cleared before submitting a new drug application). Though it’s worth noting, around 50% of phase three trials don’t result in approvals.

Jazz is targeting a minimum of five novel product launches by the end of the decade.

In the shorter term, it’s set out a $5bn revenue target for 2025, nearly 40% above the midpoint of 2022 guidance. It’s also targeting a five percentage-point improvement in underlying operating margin.

If it can meet these goals, the forward price to earnings multiple of 8.8 doesn’t look too demanding.

Drug discovery is inherently risky even for late-stage candidates though. And Jazz might have to pedal harder to achieve those margins in the face of inflationary pressures.



Regeneron’s combined antibody treatment, REGEN-COV, was an early addition to the clinical weaponry employed against Covid-19. Its removal from the list of drugs approved for emergency use in the US has prompted management to curtail this part of Regeneron’s development plans.

The omission of REGEN-COV left a $2.6bn gap in recently reported second quarter revenues, which fell 44% to $2.9bn. More encouragingly, non-REGEN-COV revenues increased 20%.

Within that was the flagship EYLEA, used for the treatment of multiple eye conditions, which grew by 14% to $1.6bn. Though, management will need to keep an eye on emerging competitors in this space.

With operating expenses broadly flat, even after an increase in R&D spend, the removal of REGEN-COV revenues was keenly felt as operating income fell 67% to $1.1bn. Importantly though, free cash flow more than doubled to $2.3bn, reflecting improved working capital, leaving net cash of $12bn.

Of the stocks in this article, Regeneron is perhaps the stock where investors are pricing in the highest probability of future success. That’s because it’s trading on a forward price to earnings multiple of 14.7. That said, this is well below its ten-year average.

Regeneron’s drug discovery capabilities are complemented by its VelociSuite technology platform. It’s currently responsible for around 20% of original, FDA-approved or authorised, fully human monoclonal antibodies currently on the market. This is a large and fast-growing treatment area, with a current market size approaching $200bn.

Regeneron’s pipeline comprises some 35 clinical programs, including lower-risk programs to obtain additional authorisation for products already on the market.

We could see some near-term additions to Regeneron’s sales catalogue with three marketing applications already submitted this year, and a further 18 targeted by the end of 2024. That could provide a boost to revenue, but remember, approvals certainly aren’t guaranteed.


Gilead Sciences

With recently upgraded 2022 revenue guidance ranging between $24.5bn and $25bn, Gilead Sciences is the most mature of the three companies.

It has the additional attraction of being a dividend payer with a prospective yield of 4.7% – remember though, yields are variable and not guaranteed.

Current year prospective dividends look to be just about covered by earnings, though there’s expected to be more headroom in 2023.

Gilead does carry substantial net debt of $21.5bn. But with free cash flow of $1.7bn in the second quarter alone, it can afford to spread its cash. It’s already reached its 2022 debt repayment target of $1.5bn.

Gilead has benefitted from the fight against Covid-19 with its antiviral Remdesivir (branded Veklury). Though, sales of Veklury are falling rapidly from their peak, but are only around 10% of the total revenue mix.

Elsewhere in the portfolio there are some fast-growing segments.

In the second quarter, total product sales were flat at $6.1bn, but up 7% excluding Veklury. Oncology (cancer) treatments generated growth of 71%, albeit from a relatively low base reaching total revenues of $527m. Its combination treatment for HIV, Bitkarvy, is its biggest seller and grew revenues 28% to $2.6bn.

Operating profit fell by 10% to $2.0bn, predominantly driven by an increase in external R&D spend.

With its size comes firepower to drive R&D. The pipeline comprises 58 clinical stage programs as well as 11 assets over which it has the option to partner.

At the same time, this incurs considerable expense, and the requirement for a higher number of approvals to make an impact. Notably Gilead has two candidates where applications for marketing approvals have been filed – Lenacapavir, a long-acting HIV treatment for heavily treatment experienced people and Hepcludex for the treatment of Hepatitis D.

Decisions on either of these could offer short-term value drivers for the group that’s currently trading on a forward price to earnings multiple of 9.5 – below its long-term average and that of the wider sector.

This might represent an interesting opportunity for investors seeking exposure to a cash generative biotech, with a diversified product portfolio and research pipeline.

However, there are risks in the US with pressure on drug pricing, and the ever-present prospect of expensive failed development programs.


Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.Please see our full non-independent research disclosure for more information.

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