Selection, SMEs and oncology: this is how Candriam focuses on healthcare

According to the senior biotechnology analyst Pasquale Sansone, rates and megatrends will boost the sector on the stock market. That's why the company is ready to ride the rally through a fund focused on one of the most promising segments: cancer treatments

by Giulio Zangrandi

With the demographic transition affecting all major Occidental Countries, spotlights on the healthcare industry are coming back. Including those of investors, who are increasingly confident that the industry can take off in 2024. The group includes Candriam, which a few years ago launched one of the few European funds focused on companies active in the development of cancer treatments and services. An initiative that Pasquale Sansone, senior biotechnology analyst at company, consider as a part of the effort to ride the trend on the equity market.

According to Candriam's view, the healthcare sector could be on a growth path in 2024. What macroeconomic factors support this expectation?

The healthcare could be better in 2024 relative to broad markets, but this also depends on macroeconomics: with the US economy still going rather well, a further slowdown is what is needed to make this sector perform. Investors’ focus is still on the IT sector and specifically AI (artificial intelligence).? Our main scenario is a further global economic slowdown, a gradual further normalisation of inflation followed by interest rate cuts. Medical consumption is not linked to macro-economic conditions while lower interest rates boost inflation.?

What internal industry trends will support this rally? And what are the more cross-cutting megatrends?

As people age, the prevalence of chronic diseases like cancer increases. Academic research and innovations such as AI are bringing in new tools for drug discovery which is unprecedented: we call this ‘biotechnological revolution’. There is a significant unmet medical need to find more durable and cutting edge cures. We think that these tools, together with a better understanding of diseases (the so-called ‘translational research’), will speed up drug development.

What are the risks and opportunities globally for the sector? What, on the other hand, are the segments that are likely to perform better and what drivers will drive them?

The demographic tailwind, and product innovation to cater to this rising treatment needs are some of the main opportunities,? hence stock picking and understanding of treatment paradigms remain very important from an investment perspective. However, this is also the biggest risk: a lot of work and means are needed to be able to assess a company’s outcomes, at it is linked to medical innovation and competitive advantage versus what is called the ‘standard of care’. Political rhetoric on the cost of healthcare is also a tail risk but despite this rhetoric nobody wants to stifle innovation.

Innovation happens in all therapeutic areas, including in medical technology: growth often depends on specific scientific breakthroughs. For instance, just look at how obesity treatments are improving nowadays. Oncology is well placed in this space as it is very much linked to ageing, and big efforts are being put into this. For instance 30% or more of all medical R&D goes into oncology.

Since the sector is greatly impacted by U.S. stocks, what impact will the US election have?

It can have a big impact, though nobody wants to stifle innovation, as we already explained. Healthcare will not be at the centre of the electoral debate this time, the fight is on other topics. Indeed, the debate between the current presidential candidates is not on healthcare, it is about taxation, immigration and trade. As such, we do not foresee any major additional measures being introduced on healthcare immediately, no matter who wins the election. Oncology would surely not be singled out negatively, given severity and lethality of cancer.

Net of all these factors, how to build a portfolio exposure to the sector? Better bonds or stocks or additional asset classes?

We believe that investing in stocks is the best way to have exposure to this sector, especially to smaller, innovative biotechnology companies. Such companies do usually not finance themselves via fixed income, they raise equity capital. Also, a fixed income investor has no exposure to the success of a real breakthrough new therapy, as they would only get the principal amount plus interest back. An equity investor will profit from the potentially important increase of the equity value of the company. But again, we think that stock picking plays a crucial role in identifying potential winners in this space.

You mentioned oncology, a segment around which Candriam has built an ad hoc fund. What is it and what characteistics does it have? What the performance since launch to date?

We have a great understanding of oncology research from a molecular to a translational standpoint (bench to bedside). In other words, we understand and have studied the heterogeneity of this disease and believe we can research and select drugs, clinical trials and companies that are well positioned to make an impact in this space. We think that the knowledge we have built within our team is key to select winners and mitigate risks borne out of drug development in oncology.

Oncology is mostly linked to ageing, and given the continuous rise of the number of people over60 in the world, many more people will unfortunately be diagnosed with cancer. This means the medical need is significant, and further improvements in diagnosis and treatments are warranted. Between 30 and 40% of all medical research is focussed towards cancer, and we expect that new products will extend people’s lives and potentially even lead to a cure. With our fund, we want to support this evolution by investing in those companies that have promising products and pipelines. Candriam also pledges to donate 10% of its net management fee to charities and research organisations in many countries, as non for profit research is essential to better understand the causes and specificities of cancer.

Beyond this product, Candriam has a distinctive approach to the healthcare sector. What does it consist of?

We have several funds in the heathcare space, including those investing in oncology and biotechnology, just to name a couple, but the common approach is that we focus a lot on the actual products the companies in this sector develop and commercialise. In the healthcare space, commercial success only happens if the products are best in class and help patients. Hence, as an investor, one needs to understand how specific diseases are being treated, and how competitive new products are. One has to think like a doctor, and this explains why we have expert professionals with a scientific research background in our team.