By: Gerrit Smit
Healthcare is an industry with good, sustainable growth potential. It is set to grow in excess of population growth as overall wealth increases and demographic shifts mean people are living longer almost everywhere in the world. According to the Deloitte 2019 Global health care outlook, global healthcare spending is projected to grow at an annual rate of 5.4% in 2018–2022, a significant increase from 2.9% in 2013–2017.
Despite this promising outlook, however, good investment results don’t always materialise. There are several fundamental reasons for this.
One is the legal risks associated with the sector and the possibility, dealing with human life, of treatment going wrong. Another is that treatments are often highly patented. Companies can’t rely on developing a replacement blockbuster when a patent expires. And once it does, the market for generics - pharmaceuticals whose chemical formula is the same as once patented drugs - is fiercely competitive.
Profitability is another factor. In most countries governments are by far the largest clients of healthcare companies, their enormous concentrated buying power forcing prices down. A combination of these various headwinds results in lower than average ratings on many pharmaceutical shares, not to mention volatile share performance.
The animal drugs business by contrast, overcomes many of these challenges. Organic growth potential in the sector exceeds that of human healthcare for two main reasons. The first is that human consumption of protein grows in excess of the world population as wealth increases, especially in emerging markets. Livestock and fish farming, and the treatment of those animals, benefit directly in this context.
The second is the changing role that pets play in human life. Around the world pets have become increasingly associated with families and in many cases are more ‘humanised’ within the family context.
Social and demographic trends have had an impact on this. The aging population means that as people grow older, they own pets for longer. People are also waiting longer before starting a family, often having pets first.
Market intelligence agency, Mintel, estimates that people in the UK will spend £2.1 billion on pet care products and services, including toys and health check-ups, by 2023 a 25% increase from an estimated £1.7 billion in 2018. To accompany this growth, animal healthcare has several advantages over human healthcare.
First, there tends to be more brand loyalty and less generic competition than in human drugs. Additionally, the legal risks are much lower compared to human healthcare and there is also less pressure on margins and prices due to very little concentrated buying power – veterinary clinics simply don’t have the scale of national governments.
These factors combined are good news for investors. Indeed, for animal treatments, many of the challenges facing human healthcare recede on closer inspection. And with long-term organic growth perceived to be in excess of 5% per annum - almost double the growth potential for human treatments - the sector continues to looks attractive for investors.
Disclaimer: This article has been prepared for information only. The opinions and views expressed on any third party are for information purposes only, and are subject to change without notice. It is not intended as promotional material, an offer to sell nor a solicitation to buy investments or services. We do not intend for this information to constitute advice or investment research and it should not be relied on as such to enter into a transaction or for any investment decision.
Whilst every effort is made to ensure that the information provided is accurate and up to date, some of the information may be rendered inaccurate in the future due to any changes.
© Copyright Stonehage Fleming 2019. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission.
It has been approved for issue by Stonehage Fleming Investment Management Limited, a company authorised and regulated in the UK by the Financial Conduct Authority and in South Africa by the Financial Sector Conduct Authority. It has also been approved for issue by Stonehage Fleming SA which is regulated in Switzerland by the Association Romande Des Intermédiaires Financiers and Stonehage Fleming Trust Holdings (Jersey) Limited which is regulated by the Jersey Financial Services Commission.
Find out more about Stonehage Fleming's Investment Management offering