My son always wanted to return to New Zealand.
In the depths of the European winter, I once asked him what he missed. ‘It was a happy place,’ he said.
And it was. Always. In my memory. At the same age, nine; a never-ending summer of Marmite sandwiches, tree huts, and go-karts.
Until last week. A chilling reminder that there is evil everywhere in the world. I sat at a pew in my own faith community on Sunday, reflecting how it would feel to lose a similar number of people. And I felt sick to my stomach.
Despite the cloud, the challenge remains. To find good. To develop, to prosper, to try and leave things better, and to try and invest in what is worthwhile.
So it was a relief to hear that Christchurch Hospital was coping with the tragedy when it occurred. This is a hospital that has treated mass-casualty events before (the earthquake in 2011).
As investors, we look to grow wealth so vital areas like a first-class health system get paid for. And so you can support yourself financially, with or without work.
This week, I’ve been looking at healthcare businesses to invest in. It’s been an industry I’ve been involved with for many years. It’s certainly not perfect. But when it restores life and limits disease, it’s hard to argue that it hasn’t changed the world.
Lengthening and protecting life
Modern pharmaceuticals can decrease disease and prolong life. Vaccines and antibiotics have wiped out many of the causes of early death. Life expectancy has been transformed. At the turn of the century, on average, we expected to live to our mid-50s. Today that expectation is toward our late-70s, early-80s, and beyond.
We could be in for an anti-aging revolution.
Biologist Shripad Tuljapurkar of Stanford University believes our lifespan will continue to increase dramatically. With advancing medicines and anti-aging therapies, he believes lifespans could increase by 20 years. This would see the most common age of death in developed countries like New Zealand increase from roughly 80 years to 100.
Correspondingly, the age of retirement may also need to increase 20 years to be fundable. So retirement age increases to 85. And KiwiSaver stays locked until then.
I’m not saying this is going to happen anytime soon.
Two clear trends
We’re living longer thanks to advances in healthcare.
We’re going to need to pay for that.
As investors, we look for trends. And we look for financial instruments upon which to ride those trends. After analysing and investing in major pharma companies over the past few years, it appears to me that many look expensive today. A lot of people have already joined the trend.
Pharmaceutical companies are also difficult businesses.
Researching and developing life-lengthening medicine takes huge investment. It requires extensive lab work and then a process of clinical trials. Success is not guaranteed. Despite the speeding up of drug approvals in recent years, it still takes time. Not all get approved.
Then, once medicines receive a patent and begin selling, there is the ‘patent-cliff’. When the patents on medicines run out, any pharma company can produce them, and there’s no longer the exclusivity.
Some say that’s good. But it’s important to keep in mind that pharma companies need exclusivity and the profit it protects. That funds the expensive process of researching and developing breakthroughs in medicine.
Many of the big pharma companies face steep patent-cliffs. They need to develop new medicines to achieve future growth and income.
A growing pharmaceutical company
One company in this area has provided some growth with stable dividend income over the years.
Sanofi S.A. [EPA:SAN] is a multinational pharmaceutical company headquartered in Paris. It is the world’s fifth largest pharma company by prescription sales and the world’s largest producer of vaccines via its subsidiary Sanofi Pasteur.
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Photo source: Evaluate.com |
Sanofi currently offers several things I look for as an investor:
- Growth potential
Sanofi is strong in diabetes, cardiovascular, and vaccine medicine.
425 million people worldwide suffer from diabetes. That’s projected to rise to over 640 million by 2040. In 2015, an estimated 17.7 million people died from cardiovascular disease. It is the biggest killer of human beings globally.
Although Sanofi’s best-known diabetes drug Lantus has come off patent, the company retains strong leadership and R&D advantage in this area.
It is also among the strongest of the pharma companies in emerging markets, where most new demand is expected to come from. In 2017, 29% of the business came from emerging markets.
R&D is also focused on realising the promise of genomics, which could potentially lead to immuno-oncology transforming cancer treatments.
And there’s increasing product diversification.
Last year, Sanofi completed an $11.6 billion acquisition of Bioverativ to gain exposure to the $10 billion-per-year haemophilia market. Haemophilia is a mostly inherited genetic disorder that impairs the body’s ability to make blood clots. It can affect up to 1 in 5,000 people.
The company is also working on creating a more agile business through restructuring. That should increase the ability to grow shareholder value.
- Reliable income
Sanofi currently pays a sector leading dividend of approximately 4%. Over the past 10 years, the company has increased its dividends. It has been a very reliable dividend payer with the ability to pay dividends directly from its earnings.
- Value in the share price
The share price currently sits at a five-year midpoint as investors have reduced holdings concerned over declining sales as patents run out. However, the share price has started steadily rising again this month.
Analysts have ranked the stock to outperform. With the potential for income and growth from new drugs on top of a strong business, the patent-cliff risk may have been oversold.
Despite this, Sanofi managed to grow revenues by just under 3% over the past five years. Other large pharma competitors with patent-cliffs saw declines of over 3%.
In addition, current share price places only a 70% premium on book value, as opposed to the 500%+ some other large pharmas sell for.
- Moat
Like the moat surrounding a castle, in share-speak, a company’s moat is what protects it from competition. Not only does Sanofi possess leadership in key medicines, it has a protected position in its vaccines business.
It has contracts with the US Department of Health and other public health departments around the world. In 2016, it was the eighth largest supplier of medicines to Pharmac here in New Zealand, which spent nearly $50 million with the company.
Of course, Sanofi is not without risk. While it could offer income with growth as it rolls out its R&D pipeline of new drugs, there is no guarantee clinical trials or approvals will be successful. Meanwhile, the loss of exclusivity on their key diabetes drug means competition from other pharma companies will continue to chip away at their income.
People are living longer. That is wonderful. But living must be paid for.
For those willing to take some risk — the possibility of achieving income from your capital alongside growth of that capital, could prove a winner over the long run.
Regards,
Simon Angelo
Analyst, Money Morning New Zealand
Important disclosures
Simon Angelo owns shares in Sanofi S.A. [EPA:SAN] via portfolio manager Vistafolio.