MARC ASHTON: Welcome to the Moneyweb Offshore Investing podcast. Today I’m joined in the studio by Simon Brown founder of justonelap.com. Simon thanks for joining us.
SIMON BROWN: My pleasure Marc.
MARC ASHTON: The healthcare sector – this is the subject of the podcast today. You know it’s a fascinating sector in South Africa but for maybe the wrong reasons. I was just looking at Aspen: 550% odd [share price appreciation] in five years, that’s a phenomenal investment. It’s making steps to be able to break into the international markets; it’s a fantastic global success story. And then you start looking around … you look at the hospital groups and you think, gee, they’re sold solid businesses but, they’re effectively service businesses trying to fill their beds.
In terms of bio-technology we don’t really have much in that place but we had an interesting listing in the form of Litha, we had Cipla at some point but they’ve come and gone and they’ve never really set the world alight [anyway]. Healthcare is probably not the most exciting sector in South Africa. What are our opportunities offshore?
SIMON BROWN: In the [existing] healthcare market, it’s a bit boring in South Africa, but it’s critically important. We’re living longer and we’re spending more on it because we’re typically richer. We’re spending more on healthcare than we ever have before. In the US there’s an iShares US Healthcare ETF, the code is IYH and what it does is it tracks a basket of US healthcare stocks.
So we could argue “what about Europe and the like” and there are some but we’ve got to say…I think the core of global healthcare is probably happening in America. And this tracks that basket of the healthcare. The ones we know: Johnson and Johnson, Pfizer, Merck is in there and a couple that we don’t. A little over two thirds is pharmaceuticals and Bio-tech; the other third is equipment and services… it gives us that basket.
But what worries me about healthcare is that the company that finds for example the cure for cancer, will make some money off it but countries around the world are going to come to them and say that “we want discount prices” as they did with ARVs. They’re going to say that healthcare is a human right, which is hard to argue against and we don’t know which company is going to find it and if they do they might not make as much. You actually want the company who is going to find a lifestyle drug. Pfizer springs to mind with Viagra.
Again, I have no clue which it is, so I go and buy the basket and it’s done incredibly well. Year-to-date it’s up 27% odd, it’s up 125% in the last three years.
MARC ASHTON: Are we buying drug companies though…I think we looked at the spectacular side of bio-technology and we see these great things that shoot the lights out. Drug companies themselves have been very defensive if you look at the big players – Pfizer and Merck for example – and there’s quite a lot of consolidation happening there. When you look at this ETF is it something that represents growth, a mixture of dividends and growth or is it simply something that you’re taking a long-term punt on healthcare as a general theme?
SIMON BROWN: The dividend is very small…it’s got about a 1% dividend yield primarily because a lot of these companies are spending literally hundreds of billions of dollars on R&D funding, not just the cancer cure and the next Viagra but everything in-between: the headache pills and the like. If you call it defensive then you’re 100% right. Healthcare is defensive.
What we see around the world, in South Africa (Aspen springs to mind and our local hospital groups), and indeed this ETF – is that they’re not cheap. This is trading on a price to earnings ratio of 30 which intuitively is massively expensive.
But [it’s related to the] longevity that we’re seeing in the world. Simply stated, if you’re 60 years old today you’ve got a 50% chance of making it to 90. Fifty years ago at 60 you had a 50% chance of making it to 70. We’ve added 20 years, a third to our life expectancy and the implications for that are humungous. So what we’re seeing is a ground shift that’s happening. Emerging market are seeing growth in their middle class and they want better healthcare and the like. And that’s what we’re being accommodated for so whereas a simple drug that one perhaps took, for example Eltroxin for thyroid, there were X number of people on earth taking it, there were multiples of that number of people who were simply undiagnosed because of their situation and we’re tapping into that. So it’s also just tapping into a planet which is becoming more middle class at the same time as new exciting drugs.
MARC ASHTON: I think I’m a South African investor: I’ve gotten used to this emerging market theme, I love the idea that it’s a growth market. So one thing that does worry me: I think sometimes I look at the US and maybe it’s a developed or maybe it’s almost a stale market.
You talked about this ETF and you say that it represents a lot of the US players, what do we say to somebody who says “I want to actually cash in on the emerging market theme?” Do I say to them – you know what go and find the individual stocks; or by buying these blue chips you do actually (much like Unilever, does) play in the emerging markets? Do you use the same argument for the pharmaceutical players coming into emerging market or developed market?
SIMON BROWN: You’re not going to find a healthcare ETF for emerging markets, Latin America, BRICS or anything like that. You would perhaps get a European Union one but I’m with you in saying you know, Johnson and Johnson, we are using their products, we are sitting here on the southern tip of the continent of Africa, we are users of Johnson and Johnson, as we are Pfizer and Merck…these companies are true global companies. And a part of what their appeal is, as I mentioned a moment ago, is that they are tapping into these emerging markets with the expanding middle classes and the increase in LSM levels of individuals – these guys are there and they’ve got the drugs.
And it goes back to, and I used an example of a drug that’s needed as a treatment but even just a headache pill…there are vast swathes of this planet where if you’ve got a headache, there’s no pill because there’s no way to get to it. That is slowly starting to change. So even just a modest (I don’t want to mention a brand) headache pill where the margin is two US cents and the growth 30 years ago on that was 1% a year, they can now start getting double digit growth because of the change in emerging markets.
MARC ASHTON: So healthcare is an opportunity, remind us again of that ETF?
SIMON BROWN: So it’s the iShares US Healthcare ETF code IYH, trading on the New York Stock Exchange. There’s not an index so it’s bespoke that they have created.
MARC ASHTON: And available through Webtrader?
SIMON BROWN: Available through Webtrader
MARC ASHTON: Thanks Simon.
SIMON BROWN: Always a pleasure.
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