111. Investing in healthcare during a global pandemic

23 December 2020 (pre-recorded 17 December 2020)

Below is a transcript of the episode, modified for your reading pleasure. Please check the corresponding audio before quoting in print, as it may contain small errors. Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at your time of listening. For more information on the people and ideas in the episode, see the links at the bottom of the post.

[INTRODUCTION]

Juliet Schooling Latter (JSL): Hello and welcome to the Investing on the go podcast. I’m Juliet Schooling Latter and today I’m joined by James Douglas, manager of the Polar Capital Global Healthcare Trust. Hello James.

James Douglas (JD): Good morning, how are you Juliet?

JSL: Yes, good, good, thank you.

[INTERVIEW]

[0:16]

JSL: Healthcare has been very much under the microscope this year with the world focusing on a vaccine. And now we we’ve got several. What are your thoughts on the rollout?

JD: Yeah, it’s been an absolutely remarkable year in many respects, and I’m happy to share our thoughts, but I guess it’s probably worth just reflecting a little bit on the journey. I mean to go from the discovery of the virus, to go through you know, the mapping of the genetic material, producing the vaccine, running the trials and getting emergency approval within a year, it is really, really quite remarkable. And so, as you rightly pointed out, the next stage is one of rollout. I think for us we’re optimistic. And the reason I use that word is that you may well have read in the press that the vaccines that are available now are using very novel technology. And that technology means that they have to be stored over what they call super chill temperatures. So the Pfizer vaccine, for example, needs to be stored at around minus 70, and the Moderna vaccine needs to stored at around minus 20 degrees centigrade. So that is a logistical challenge, but we’re optimistic because these companies have experience, they ran the clinical trials, they ran those clinical trials in a wide range of facilities. And so I think that as we move through 2021 I’m optimistic that the role that will be effective.

[1:40]

JSL: So will we all be vaccinated by the end of 2021?

JD: I think that’s probably optimistic. If you look at what the companies have said, I think Moderna has said that they can manufacture up to a billion doses between 500 million and a billion. Pfizer has said up to 1.3 [billion]. So obviously if you add that together, that’s 2.3 [billion], but don’t forget they both required two doses. And so you have to halve that when it comes to calculating how many people could potentially be vaccinated by those vaccines. The very last point I would make on the subject is: don’t forget, there are other vaccines hopefully coming behind them using more traditional technology. So the journey has started. It’s been incredibly impressive. But I do think there’s going to be more developments as we move through 2021.

[2:27]

JSL: And the sector itself performed very well in the initial months of the pandemic, but it sort of rather tailed off in recent months. Why is that?

JD: Well, I think the first thing to say is we think the fundamentals of the sector are very strong, but I think there was two things that happened. Firstly, as we were leading into the US elections, there was a concern amongst the investor base that there would be a blue wave. And by blue wave, I’m essentially referring to a Democrat in the White House, but also a Democratic majority within Congress. And that created some concerns that you might get quite far-reaching healthcare reform in areas like insurance and drug pricing. So you did see a little bit of pressure particularly on the pharmaceutical stocks. And obviously then we got through the election and actually prima facie is quite positive. And I’ll explain later, but essentially if you have a Democrat in the White House, but a divided Congress, that’s going to make it quite difficult to get any draconian measures through. And so that was a positive, but then the next thing that happened was we had the positive vaccine data. And that really, really was a catalyst for the market to think about asset allocation. And what you found is that during that period, there was more interest in more value, cyclical type investments like oil and gas, travel and leisure, maybe the banks as well. And so we sensed that actually there were other areas of the market during that period that were maybe more attractive. And so healthcare, being a bit more defensive, probably struggled a bit under that scenario.

[4:08]

JSL: Right. So a Joe Biden presidency that’s not sort of negative for healthcare, for US healthcare?

JD: Well just if one takes a step back, if you look at history, then a Democratic president tends to raise a few more questions than maybe Republican one, but the important thing really to focus on now that Joe Biden is in, is what’s happening within Congress and within the Senate. Because if the Republicans retain control of the Senate and we’ll find out in early January, then it’s going to be really, really difficult, we think, for the administration to get any new legislation through. So some of the more far reaching proposals that may have been evident six months ago will be probably quite difficult to get through. So if we have a situation whereby Joe Biden is in the White House and the Republicans have a majority in the Senate then I think you’ll essentially get legislative gridlock. And that means the status quo remains. And for us, that’s a positive for healthcare.

[5:16]

JSL: Good. And your portfolio it’s sort of invested generally in developed market companies. Do you not find opportunities in Asia or emerging market healthcare stocks?

JD: No. Yeah, that’s a super observation and we think emerging markets are going to be a really important source of growth for healthcare. Not just governments investing in infrastructure in healthcare, but also, you know, we’re seeing tangible evidence that they’re changing the way they look at their regulatory processes and look at their reimbursement processes. However, we can access that growth through multi-nationals. So for example, the pharmaceutical sector has quite high levels of exposure to areas like Asia Pacific and China. Life sciences and tools is another sub sector that we invest in that has exposure to those areas, as is med tech, but to a slightly lesser degree. So we do think it’s a super important source of growth. We can just access it in slightly different ways as opposed to maybe going direct.

[6:18]

JSL: And what is your outlook for next year, for the sector in general, and are there any sort of sub sectors that you particularly like for 2021?

JD: Yeah, we’re super excited about the medium term. You know, we think there’s going to be some terrific durable growth opportunities in healthcare. And why do I say that? We think we can identify some quite important themes that we can invest in. And so what might they be? They may be things like generating efficiencies. A lot of healthcare systems globally have to become more efficient. And so can we find products and services that really are driving that efficiency? Whether it be virtual interactions, whether it be robotics, whether it be shifting patients from a high cost setting like a hospital to a lower cost setting like the home. And so that’s one of the themes that we’re really interested in.

Another one is obviously innovation. I think COVID-19 has been a super example of how innovative, particularly the biopharma industry has become. And so that’s going to be as important theme for us. We also think that emerging markets, to your point, is going to be an important source of growth. And we can access that growth through a variety of sub sectors, whether it be pharmaceuticals, biotechnology, life sciences and tools, medical devices, and also the clinical research organisations. You know, these are the companies that will go to a funded biotech company and say we will run the clinical studies for you. And that feeds kind of nicely into one of the other areas that we’re interested in and that’s one of outsourcing. We think that’s a trend that will continue.

And then finally, you know, one of the cornerstones of all public health systems is prevention. You know, diagnostics is going to be super important. I think COVID-19 has been a catalyst for some healthcare systems globally to invest in diagnostics. And we think there’ll be pull through into other areas as we move forward and then ultimately obviously vaccines as well are super important. So they are kind of the underlying themes that we’re really interested in.

JSL: Outside of those key investment themes that you’ve just mentioned. I just wondered, is there anything else that you’re thinking about?

JD: Yeah, actually yeah, I think the one thing that I neglected to mention was M&A. I mean, healthcare is highly fragmented. More mutual companies have very strong balance sheets. So I think that augmenting internal assets with external assets and looking at external sources of growth will be a theme that will likely be, you know, continuous and will continue into the medium term. So I’d probably highlight that as one of the things I probably neglected to mention.

And the luxury, if that’s the right word to use, we have, and the opportunity we have is that healthcare is incredibly diverse. So it doesn’t really matter what the regulatory, the political and economic climate is like, we hope and we believe, that we can find opportunities regardless of those cycles across the continuum.

JSL: That was great. James, thank you so much for your time today.

JD: No, you’re very welcome. Thank you very much.

JSL: If you’re like more information about Polar Capital Global Healthcare Trust, please visit fundcalibre.com and don’t forget to subscribe to the Investing on the go podcast.