Health-care picks for portfolios

As vaccines for Covid-19 roll out amid ongoing lockdowns and surging infections, the new year is off to a hopeful, if shaky, start. For investors, there’s also hope that the vaccines’ impact on markets will be positive.

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Investors have their eyes on multiple global companies — from the U.S. to China and Russia — as these companies’ respective vaccines become available.

Canada and the U.S. have authorized vaccines from Pfizer-BioNTech (U.S.- and Germany-based, respectively) and U.S.-based Moderna.

On Monday, the vaccine developed by U.K.-based AstraZeneca PLC and the University of Oxford was administered for the first time as part of the U.K.’s vaccination campaign.

“It is big pharma, and health care more broadly, that is playing a key role in the development and rollout of the vaccine,” said Murdo MacLean, client investment manager at Walter Scott & Partners Ltd. in Edinburgh, Scotland.

However, companies in testing and diagnostics are also involved, such as Switzerland-based Roche Holding AG.

In the first half of last year, the broader health-care sector performed relatively well as investors sought refuge from market volatility.

“The traditional defensiveness of [health-care] businesses came to the fore, [as] investors were worried about more cyclical parts of the economy, more indebted sort of companies and businesses that were severely, directly impacted by the virus,” MacLean said.

As such, health-care names were “an important part” of portfolio performance in the first half of 2020.

Since then, these companies have been “reasonably positive contributors,” performing as expected, MacLean said.

“They continue to be, looking at our portfolio, very strong businesses that retain our confidence.”

Companies that treat disease, including Roche and fellow Swiss firm Novartis AG, are well positioned for market growth. MacLean also cited Denmark-based Novo Nordisk A/S, a global leader in diabetes treatment.

Such names “possess industry-leading positions, and all the profitability and strong balance sheets that you would assume,” he said.

“We are very positive on the exposure.”

For the market more broadly, vaccines are “the oxygen that many sectors of the economy have been waiting for,” MacLean said. However, the fix won’t be quick, as vaccination will take time.

“As we go through that [vaccination] process, the economy and wider market will continue to see more benefit and relief,” he said.

Beyond pharmaceuticals and drugs, MacLean is optimistic about health-care businesses in the portfolio that are expected to provide “decade-plus growth opportunities.”

One is California-based Edwards Lifesciences Corp., a medtech that provides a minimally invasive outpatient treatment for aortic stenosis, which affects heart valves.

It will be some time before Edwards’ treatment becomes the dominant standard of care, and diagnosis of the disease is low, MacLean said.

“So, there’s a huge opportunity for Edwards to continue to grow into that space.”

Within all sectors, “it’s that penetration story that’s driving growth,” he said. “You have a best-in-class product or service that is seeking to replace what is there.”

Another example is California-based Intuitive Surgical Inc., maker of da Vinci robotic surgical systems, which has been in the firm’s portfolios for several years.

“Some of the best years are still ahead of it,” MacLean said, as the proportion of surgery performed robotically increases.

One of MacLean’s newer holdings is San Diego–based Illumina, Inc., a global leader in gene-sequencing technology, which will allow for precision in personalized medicine.

Illumina’s growth will likely be measured in decades.

“It doesn’t get much more long term than this,” MacLean said. “Opportunities for differentiated therapies and treatments are still very rich ahead of us,” he said — especially in the medical device space.

“That will continue to be an area where the research team at Walter Scott are finding good ideas.”

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