Why healthcare stocks got a bump from Trump

Glenn Freeman | 28/11/2016

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Glenn Freeman: I'm Glenn Freeman for Morningstar and I'm joined today by Chris Kallos, our Australian healthcare equities analyst.

Chris, thanks for joining us.

Chris Kallos: Thank you, Glenn.

Freeman: Just firstly Chris, Australian healthcare companies have been performing quite strongly, particularly in recent years. Why is this?

Kallos: Well, a combination of things. Firstly, on a relative basis, we've seen the mining sector fall away. Banks have been up and down.

So, healthcare has been pretty consistent.

Added to that is the fact that many of the large healthcare companies that we have around us today have been around for a number of decades during periods of volatility.

So, what we're seeing now is a seasoned performance, if you will. People have gone through rough patches who have benefited from consolidation, who have worked up very strong business models--and names that come to mind include Ramsay, Sonic, CSL.

They've been around for decades. So, it stands to reason that they've worked out certain wrinkles in their business plans and their business models and that's what we see today.

Freeman: Now, Chris, in the lead up to the U.S. election and in the immediate aftermath, the US healthcare sector has seen some pretty big movement. How has this been reflected in the Australian healthcare sector?

Kallos: Well, the healthcare sector like all the other sectors were bumped on the election of Donald Trump.

There is a high expectation that he will roll back some red tape for drug approvals in the FDA and there's also now a reality of Hillary Clinton not being able to execute or act on her promise to control drug prices.

So, both of those things have been seeing positively for the US healthcare sector and we've moved in tandem out of sympathy or sentiment.

Obviously, not every stock is affected the same way, but companies like CSL, Mayne Pharma on the generics side, theoretically could benefit from this kind of rhetoric on Donald Trump's side.

Freeman: The US government has been conducting an enquiry into generic drug pricing. How has this flowed on to Australian companies?

Kallos: That's right, Glenn. Well, that probe came directly as a result of a few scandals last year in generic pricing and allegations of gouging which fueled a lot of the rhetoric that the democrats were pushing.

The probe itself is into certain generic molecules of doxycycline and digoxin. The only companies that are affected in that space are Mayne Pharma.

However, these are very small components in their overall portfolio. I don't think it's got any bearing on their business as such going forward.

Freeman: Now, just lastly, looking ahead, where do you expect growth will come from for Australian healthcare companies?

Kallos: Given that the large caps, namely, CSL, ResMed, Ramsay and Sonic are all now global companies, I think most of the growth will come offshore. That's definitely the case with Sonic and Ramsay.

Ramsay is the number one private service provider in France, for instance. They've got a very strong business in the UK.

Sonic, likewise, is doing a lot of work in Europe and also the UK. And that makes sense given that their market share is almost kept out in the Australian domestic environment.

 

This report appeared on www.morningstar.com.au 2017 Morningstar Australasia Pty Limited

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