Long-term themes good for health and growing wealth

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In this episode, the focus is on healthcare, a sector with enduring appeal. Joining Kyle to explain the key long-term trends he’s tapping into is Jamie Douglas, manager of Polar Capital Global Healthcare Ord (LSE:PCGH) Trust. Douglas discusses ageing populations, and innovation by companies responding to medical needs, and also addresses performance and political risk.

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Kyle Caldwell, funds and investment education editor at interactive investor: Hello, and welcome to On the Money, a weekly bite-sized show that aims to help you make the most out of your savings and investments.

In this episode, we’re going be covering how investors can potentially make wealth out of health, talking through key healthcare trends, valuations, and political risk.

I’m joined by Jamie Douglas, manager of Polar Capital Global Healthcare Trust.

So, Jamie, the first long-term healthcare trend I wanted to ask you about is ageing demographics. There are certain healthcare companies that are tapping into the theme of the fact that we’re living for longer.

Could you first set the scene and talk us through this long-term healthcare trend?

Jamie Douglas, manager of Polar Capital Global Healthcare Trust: Yeah. I think it’s a really important question. So, we’re essentially talking about life expectancy here, aren’t we.

If you look at the UK in the last 50-odd years, life expectancy has increased by somewhere between eight and 11 years. If you look in the US, and figures vary, but every day there’s more than 10,000 US citizens who turn 65.

The reason they track that is that they can then qualify for a government-funded programme called Medicare, and similar trends are occurring in emerging markets. So, absolutely, that is a theme.

I think there’s probably two important things to add. The first one is as we get older, we get more chronic diseases. Chronic simply means long-term treatment. So, that could be diabetes, hypertension, arthritis. But I think you also have to include things such as dementia and certain cancers as well.

So, as we navigate through the path of life, you get this acceleration of costs towards the end of our lives as we get to 75 and beyond.

In terms of volume and demand for products and services, absolutely, I would wholeheartedly agree that demographics is an important thing.

Kyle Caldwell: I’m assuming there’s no shortage of companies tapping into this trend. Could you talk us through how you play the trends within the investment trust that you manage?

Jamie Douglas: It’s an important theme. One thing just to reiterate is that we’re not a thematic fund, but we do look at themes and we don’t divorce these themes from valuation and where we think we can make returns. But absolutely, we can do that.

There’s a bunch of subsectors that will benefit from what we’re talking about. There’s essentially volume coming to the system. So, that could be diagnostic companies, it could be distributors, it could be facilities, and when I reference facility, I’m simply talking about a hospital. And then medical devices, the companies that make the devices that go into your body, they can all benefit from that theme of volume, and we can expose and we can invest in that. We can invest in those companies, absolutely.

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Kyle Caldwell: Within that theme of volume, could you pick out a couple of stock examples?

Jamie Douglas: Absolutely. So, in the US, we have exposure to a specialty diagnostics company that specialises in colorectal cancer called Exact Sciences Corp (NASDAQ:EXAS).

We have, across the US, Europe, and emerging markets, India specifically, exposure to facilities or hospitals. So, we have a couple in the US. One is called Encompass Health Corp (NYSE:EHC), and we also have a company that specialises in imaging centres, that’s called RadNet Inc (NASDAQ:RDNT).

Here, in Europe, we own a company called Fresenius SE & Co KGaA (XETRA:FRE) that has some hospitals in Germany, and then we also have exposure in India as well. So, it’s a global theme, and we’re global. We’re fortunate that we can invest across the globe in that thematic.

Kyle Caldwell: How do you approach valuing a healthcare company? I assume a lot of the companies are growth focused, they are promising future growth. How do you ensure that the future growth is not already overpriced?

Jamie Douglas: Yeah. It’s a really important question. We do have valuation discipline. I think it’s important to say that it’s both art and science. So, we look at standalone valuations, we look at peer group valuations and we also look at correlation analysis as well.

But, ultimately, one of the most important things we do is try and figure out where the revision cycle is going. Are revenue and earnings revisions moving in a positive direction? If we can try and capture that, then that certainly will help us when it comes to valuing opportunities.

Kyle Caldwell: The next long-term healthcare trend I wanted to ask you about is ongoing innovation. How do you approach investing in companies that are addressing medical needs?

Jamie Douglas: That’s a really interesting point. The important point, just taking a step back, is that, actually, if companies can innovate and they can add value, then they can commercialise those assets.

Once again, we draw on experience to come up with ideas where we think there are companies that are developing products, services or technologies that will meet an unmet medical need and could have commercial value.

That’s when we really start to do our due diligence, we have a compliant network of experts, so we can speak to key opinion leaders to try and understand the patient journey, how they come into the funnel, what’s available today, and where the future is.

Once we’ve gone through that journey, hopefully we’ll come to the end of it and think this product, service or drug might have real utility and could drive long-term growth for the company that’s developing it and will hopefully commercialise it.

Kyle Caldwell: Could you talk us through the types of companies and sectors that you’re investing in within that theme?

Jamie Douglas: Yeah. Once again, it’s incredibly diverse, but I think most people would focus maybe on biopharmaceuticals, that would be biotechnology companies and pharmaceutical companies that are literally developing the drugs.

But medical devices as well, they’re going through a wave of innovation and we’ve got these new product cycles that, hopefully, if the reimbursement’s there, the demand is there, and they can execute, it can drive long-term growth.

So, it’s really across a bunch of subsectors, but for the point of this conversation and your direct question, I would probably say biotechnology, pharmaceuticals, maybe medical devices in three subsectors.

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Kyle Caldwell: How do you approach investing in companies that are trying to come up with new drugs or innovations for diseases that don’t currently have cures? Of course, a lot of the drugs that are trying to solve these problems, they don’t actually come to market, they don’t work. So, how do you approach that scenario?

Jamie Douglas: Well, the first thing we try and avoid is big binary risk. We don’t want to expose ourselves to, let’s say, late-stage clinical readouts that could create volatility. That’s one thing we do try to avoid, trying to figure out where the current valuation is and what the intrinsic value might be. So, that’s one point.

But the second thing is about doing our own due diligence and speaking to doctors and key opinion leaders about the patient journey. I said it previously, but just to reiterate, they come into the funnel, they go to see their physician, these are the current options for you, this is the current standard of care. Are the next-generation drugs or devices going to add to that, and are they going to be better, and therefore can they drive long-term growth?

Once we get to that point, hopefully, we get to that point and think this could be really interesting. Now, clearly, it doesn’t always work. Drug development is very capricious by nature. Things do go wrong, but that hopefully gives you a sense of how we approach that.

Kyle Caldwell: Companies that are aiming to create new drugs to tackle obesity have been in the headlines over the past 18 months, two years. In particular, there’s two companies that have got a bit of duopoly at the moment, Eli Lilly and Co (NYSE:LLY) and Novo Nordisk AS ADR (NYSE:NVO). I know that you invest in Eli Lilly. I think it’s the top holding in the investment trust. Could you explain when you first bought the company, and your views on its weight-loss drug programme?

Jamie Douglas: I can’t remember the precise time of the investment. It’s at least three years ago for Lilly. So, Lilly has some commercialised assets in areas where there’s large addressable markets, and so that’s diabetes, it’s weight-loss management, areas like breast cancer, and autoimmune disease. By autoimmune, think eczema and psoriasis things like that. So, it’s very diverse.

The other thing that they try to do is solve some medical problems. One might be, can I take a market that’s predominantly injectable and can I have an oral alternative? So, that’s something that they’re also pursuing.

They’re also going for what we would describe as higher-risk/higher-reward areas such as Alzheimer’s as well. So, that’s the commercial base, quite diversified. They’ve got some interesting things in the pipeline.

And quite a well-respected management team, that’s been quite stable for a while. So, they’re some of the pillars that we looked at.

Kyle Caldwell: You don’t invest in Novo Nordisk, or I assume you don’t because it’s not in your top 10 holdings?

Jamie Douglas: Full disclosure, we do have some exposure.

Kyle Caldwell: Is it a stock that you’ve been looking at a bit more closely given the fact that from around its peak, I think 18 months ago, it’s fallen about 50%, or just over 50%. Has that therefore made it potentially more attractive?

Jamie Douglas: Well, the precipitous fall has not gone unnoticed. They operate in similar markets to Lily as the point you made. They’ve got commercialised assets in the fields of diabetes and weight-loss management. They’re also interested in trying to pursue similar areas like an oral alternative and also potentially label expansions that might include something like Alzheimer’s as well. So, they have that.

One of the differences maybe is a bit more turnover at the management level and certainly there’s probably been a difference in the way the two have executed as well. But prima facie, they do the same things. They’re just in slightly different places.

Kyle Caldwell: I wanted to next move on to the political risk of investing in healthcare. Of course, Donald Trump is now back in the White House. There have been cuts to government-sponsored research budgets for healthcare and threats to squeeze drug prices lower. How do you attempt to navigate this political risk, or is it something that you just can’t navigate because it’s completely out of your control?

Jamie Douglas: Well, healthcare is extremely diverse. So, if one looks at the key risks that might be associated with the administration, they might be, to your point, government funding, they might be tariffs, they might be drug pricing.

So, then can you look at areas that are maybe a bit more protected from that, and there are some areas that are, domestic US businesses that might not have tariff risk and might not have pricing risk. So, that diversity certainly helps.

But the other thing one has to look at then is political fear, or the fear of policy change, reflected in valuations? I know it’s history, so caveats apply, but sometimes when you invest in periods of high political uncertainty, you can generate quite good returns.

So, the diversity is helpful, but also then we can’t divorce what’s going on really from from valuation. But, actually, and touch wood, we’re not out of the woods yet, but we are starting to see some signs that the political environment and the regulatory environment in the US might not be as penal as maybe we might have thought six to 12 months ago.

First, there’s the regulator in the US that approves drugs called the Food and Drug Administration (FDA), and if you look at their approvals this year up to the end of September, they weren’t that far off last year.

The point being that there’s been a lot of rhetoric and headlines, but, actually, underneath, that body seems to be functioning OK. So, that maybe gives us a bit of relief.

Second, we are starting to see companies go to the administration to try and broker deals and craft deals that maybe protect them for some of the things like tariffs and drug pricing. The quids on the other side of that is they’re having to invest in manufacturing in the US, but we are starting to see these deals being brokered, so is some of that political fear lifting as well? And we kind of hope it is.

So, you add those two together, and hopefully, you can come up with a situation where the future might be a bit brighter now than it maybe would have been six months ago.

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Kyle Caldwell: The political risk has been a headwind for the healthcare sector over the past three years. It’s been a difficult period performance-wise for any fund or investment trust investing in healthcare. Have there been other reasons why it’s been a tough period? Could you give your elevator pitch of why investors should have some of their exposure in a diversified portfolio to healthcare? What are the the long-term persuasive arguments for investors to have some exposure?

Jamie Douglas: Yeah, I’d love to, thanks. So, in terms of the first question, why has healthcare struggled so much on a relative basis, really since the beginning of 2023? There’s kind of micro and macro.

On the micro side, ie, what’s been sector-specific, you’ve touched on a lot of it already. It’s concerns about the administration in the US. It’s concerns around drug pricing. It’s concerns around tariffs as well. So, that’s really weighed on the sector.

On the macro side and on the broader market side, there’s been quite a strong appetite for other sectors such as artificial intelligence (AI) and tech, and we think that maybe we’ve been a source of funds for that.

If you look at fund outflows, that would underpin that view. If you look at the relative weighting of the healthcare sector in the US versus the broader market, it’s very low relative to history, and so that would also add some coherence to that argument as well.

So, I think there’s two reasons, one sector-specific, one more broader. In terms of looking forward, I think when one would like to be a bit more constructive, I think the first thing is the fundamentals. We operate in an industry where there are new product cycles that are driving top-line growth.

There’s innovation coming through. I think the number of approvals at the FDA in the US speaks to that, and recent results from companies point to this idea that, actually, there is demand and volume growth as well and, really, I’m referencing medical device companies. So, the fundamentals appear to be in reasonably rude health.

Second, as we touched on already, we are starting and hoping to see some of the political fears lifting. The US regulator appears to be functioning. Companies are brokering deals that might help them navigate drug pricing and tariffs. So, that’s the second thing.

And then finally, we believe that valuations are supportive. We know we are a bit unloved and, hopefully, a combination of those three ingredients can build a more constructive picture, certainly, than we’ve had for a while now.

Kyle Caldwell: So that’s all we have time for today. Jamie, thank you very much for your time, and thank you for listening to this episode of On the Money.

If you enjoyed it, please do follow the show in your podcast app. And if you get a chance, leave us a review or a rating in your preferred podcast app. We love to hear from you, and you can get in touch by emailing OTM@ii.co.uk.

In the meantime, you can find more information and practical pointers on how to get the most out of your investments on the interactive investor website, which is ii.co.uk. I’ll hopefully see you again next week.