Healthcare companies, in all their guises, have significantly outperformed the wider market and the average fund is up over 100% in three years.
In this buoyant climate, investors have merely had to be ‘in the game’ but from here, gains may be harder won and more discernment on fund selection may be needed.
Anne Marden’s approach as manager of the JPM Global Healthcare Fund is to blend a core of stable largecap companies with higher growth “disruptive” technology names, to achieve a stable growth profile.
The fund is up 143% over three years (source: Financial Express to 13 November) compared to an average return of 110% for the wider equity pharma health and biotech sector.
Unusually, Marden has achieved this without significant weightings in biotechnology, though biotechnology names have contributed overall.
Of the eight funds in the sector that have achieved a higher return over three years, five are exclusively focused on biotechnology, which has been the stand-out performer over the period.
The JPM fund can invest across all the healthcare segments globally – healthcare services, technology, biotechnology and pharmaceuticals – and in practice, will always retain a balance. The fund is focused on the major markets of the US, Europe and, to a lesser extent, Japan.
Marden will tend to access emerging markets through the larger healthcare names. She adds: “AstraZeneca, Novartis, Sanofe are big global companies, but have very strong businesses in emerging markets and that is how we get our exposure.”
On the cutting edge
Marden makes use of the JP Morgan global analyst network to decide on the larger-cap weightings for the fund.
The analyst team makes use of a dividend discount methodology which, she says, gives them a ‘common’ language with which to analyse and compare different companies.
It captures the growth profile of companies, plus cash flow and valuation, highlighting those companies with the ability to generate cash and sustain good margins.
These companies form the core of the portfolio, and about half of its stock list. Marden says: “We balance out the stable growth companies –the backbone to the portfolio – with companies holding new disruptive products and technology.”
Marden does more of the stock selection among the smaller healthcare names. While these may be highlighted by the analyst team – the analysts need to know the smaller competitors to their larger capitalisation companies – but she will often source her own ideas.
For example, she and the healthcare team attend medical conferences around the globe, which she believes is a good way to meet the cutting- edge companies.
She gives the example of DBV Technologies as typical of the type of company she wants to hold. A $900m market cap emerging healthcare name, it has a strong pipeline in food and paediatric allergy immunotherapy treatment.
She says: “It has a smart management team that understand the importance of retaining product rights. The company has developed a skin patch that delivers immunotherapy safely and conveniently through the epidermis.
“The company has a peanut allergy program that has delivered excellent phase II (b) ‘proof of concept’ data in children. Data in the adolescent group was also very promising.
“The product, called Viaskin Peanut, will enter a phase III registration trial in 2015 and could be filed with the FDA in 2017.
“The company has carried out all the work to date on its own, apart from a manufacturing contract with Sanofi. Hence the economics of Viaskin Peanut belong entirely to the company and its shareholders.” The programme could generate $800m in sales.
Disease to please
Part of the challenge is picking those diseases that offer genuine opportunities for companies to make significant revenues.
Marden says: “Where there are multiple products for the same illness, such as diabetes, there is significant price competition in the market.
“There may be three or four drugs on the market, and as long as patients meet certain health markers, it doesn’t matter which one they use…Plus, the US is showing its competitive teeth to reduce prices.”
There is also the issue that, in the US, the problem for many people is not getting a new drug, but getting access to the healthcare system.
However, there are areas where there is a strong clinical need, and also where investors will receive a stronger return for addressing that need. For example, in oncology there are potentially revolutionary products that are changing the way cancer is treated.
Companies are realising that in many cases, specialism pays: For example, Vertex sold its Hepatitis C capability when it couldn’t compete in the long-term. Instead it has focused, successfully, on cystic fibrosis.
While this is a smaller market it is less crowded and Vertex has made some significant progress.
There is also a challenge in deciding what is ‘good science’. Again, this is easier to do for certain diseases, so picking those that are more easily measured is key.
Marden says: “We have people in the team with medical knowledge, who are in a good position to judge the science. However, the ability to measure is getting much better in some areas.
“It is therefore easier to judge the likely success of an individual drug early on. Companies understand this as well and it means we can invest at a slightly earlier stage.”
That said, there are diseases, notably Alzheimer’s where it is difficult to tell at an early stage the likely results from any drug. The group has an ‘option’ on Alzheimer’s drugs through its holding in AstraZeneca, which is developing an experimental drug with Eli Lily.
It takes two
The idea of ‘partnership’ is important to Marden. “We always get to know the management of a company.
“We like seeing how they tick. Some are very ego-driven, as you might imagine, and we aim to avoid that type. I like partnership; I want to see what is driving the chief executive officer and where the science is coming from.”
She believes healthcare investors need to help companies stay independent in some cases and retaining that independence is increasingly a challenge where larger companies are looking to ‘buy’ growth.
She says: “If a company has a good programme, and then it issues more equity, we’ll play ball. When a company reaches $1bn, they will get a raft of new investors, which can provide protection, but we can partner them through the process – we did it with groups such as Alexion.”
Valuation is a thorny issue for the sector after three strong years. Some healthcare names now look well, even excessively, valued. AstraZeneca, for example, is now trading on 46x earnings.
Marden admits that valuations are higher and there is a need to be ‘market savvy’. Healthcare stocks can move significantly in a short space of time on good clinical trial results or similar. They may then move back down very quickly, so fund managers need to be nimble.
She adds: “It is about understanding what is valuable in this type of environment and who is driving value.”
The prospect of merger and acquisition activity still supports many companies in the sector. The £31bn AbbVie bid for Shire in July of this year may have failed, but there are large companies looking to deploy their considerable cash piles on something worthwhile.
Breakthrough science is still happening and larger companies want to participate. Marden’s approach blends the security of larger capitalisation companies, with the growth prospects of small, more exciting growth companies.
It is a diversified approach that has nevertheless matched the performance of more specialist funds. It also means it may have more defences if the market slows from here.
