Why I don’t regret not buying the vaccine winners

Paul Major, fund manager of BB Healthcare Trust, believes the global healthcare system is fundamentally broken. He runs though the types of companies that will transform healthcare over the next 10 to 20 years, and explains why he did not invest in vaccine winners Moderna and Pfizer.

Kyle Caldwell, collectives editor at interactive investor: Hello. Today I have with me Paul Major, fund manager of the BB Healthcare (LSE:BBH) investment trust. The BB Healthcare Trust invests in companies that are making clever use of technology and coming up with innovations to transform and fix the global healthcare system. So, Paul, what are the main areas of focus for the trust?

Paul Major, fund manager of the BB Healthcare Trust: Sure. Hi Kyle. So as you alluded to, we run a concentrated portfolio approach to investing in healthcare, but it has, quite unusually, it has a top down, thematic overlay. And, essentially, you can summarise that as we think the Western approach to healthcare is fundamentally broken. The whole industry needs to be reimagined and made fit for purpose in the 21st century, principally because we have this elderly population that we need to manage and look after, and most people, as they get older, they're burdened with chronic medical conditions. And the problem that we face is that you simply cannot raise the productivity and efficiency of the current approach to healthcare to a level where there would be enough resources to make it work.

So if you think about the NHS here in the UK, you know, every year we have a winter crisis. We have multi-decade now problems with getting enough staff and training of doctors and nurses. And we have across healthcare globally, roughly, one dollar in three or four is wasted to no medical benefit, and one in four interactions between a doctor and a patient is not is deemed not medically necessary, but after it happened. So, the way the way we've tried to approach everything is basically to think about the business of healthcare a bit like a sausage machine, and look at where all the choke points are in the system, where you can improve either the quality of care that people receive, the cost of delivering that quality care or the efficiency of the care givers to make decisions.

So, really, what we're trying to do is improve productivity or looking for companies that would improve productivity, lower cost and enable patients to receive better care and caregivers to make better decisions because, if you can make better decisions, you can avoid wastage and things like that so, the big focus is around keeping people out of hospital in the first place. When they do need medical care, making sure they only get the care that they need, and it's delivered in the most appropriate setting for them.

Most people don't want to go to the doctor, they don't want to go to hospital if they don't have to. And many times they don't need a doctor to renew a prescription or do something administrative like that. It can be done automatically or by clerical staff and so on and so forth. So, our focus is is on around 21 different themes within the portfolio and all of which have been demonstrated to improve either cost of care, quality of care or the ability of physicians to make better decisions. And we try to invest holistically across all of that to give people balance but geared exposure to all of these things, which we think will transform healthcare over the next 10 or 20 years.

Kyle: Of those 21 themes, could you pick out three themes that you have the most conviction in, to profit from the problems that are in the global healthcare system?

Paul: Sure. So the first one, let's start at the very beginning of the patient journey. Remember, I said in my previous answer that one in four medical interactions are deemed not necessary after they've happened, so probably the single most important thing we need to do is something called electronic triage and case management. So the idea is that your first interaction with the healthcare system is a digital one, and it works out how important your need is and then make sure you go to the right point of care. So you know, if you have a simple problem that you can kill with an over-the-counter remedy, then you don't need a doctor's appointment in the first place, for example. So just simple things like that free up huge amounts of resource.

Related to that, we then need to make sure that people get the care that they need and that it gets followed up. So you'll be aware, I'm sure, that people's compliance with medication over long periods of time is very poor. People often don't go to follow up appointments and people forget to do things. We're human beings, we're fallible and tools that remind and help and nudge people to being compliant with their therapy, doing their physio exercises, taking their medicines, going to those follow up appointments, doing those blood tests and those checks, all those sorts of things, they're really, really important.

And then the final thing, this may seem rather unusual, but it's about changing the site of care. There's lots and lots of evidence that people do much, much better at home and when they're involved in their own care than they do if they're institutionalised and people do everything for them, they don't engage with what's wrong with them. They're not encouraged necessarily to get better. So shifting that sort of care, more home care, more remote care, more supportive care, more early identification of people who are going to have problems later on and intervene to stop them getting actually symptomatically unwell in the first place.

They would be my kind of three things, starting at the beginning, making sure they get the right kind of care for the right cost, making sure they can comply with that, and then also, if they have ongoing medical needs that they are delivered to them in the way that's most appropriate for them to ensure success at the end.

Kyle: Has the Omicron variant changed your outlook at all for the healthcare sector, and how have the healthcare stocks responded to the new variant? Has there been an uptick in volatility?

Paul: There definitely has been, and I think it's all quite fascinating. What was interesting about Omicron is that really from what happened in South Africa, which has got a reasonably advanced healthcare system, certainly in terms of record-keeping. It was pretty evident early on that we were dealing with something completely different.

As viruses often do, the virus has significantly mutated over the past couple of years as it adapted to human to human transmission and has become a very, very different disease. Now, that doesn't always mean things get less severe. But if you think about it from an evolutionary point of view, if you don't make people obviously unwell, they carry on going about their lives and you spread the virus more easily than would be the case if you're symptomatically unwell. So you can understand all the reasons why Omicron has been so successful relative to other variants.

The challenge for the healthcare system, I think, is that if you think about how society has had to change, you know, we've all the spatial and temporal distancing and infection control things that we've put in place. They all apply doubly to a hospital. Hospitals are full of clinically vulnerable people and lots and lots of interaction. So you have to be that much more careful about infection control. So healthcare is going to be one of those sectors where in terms of capacity utilisation, it's going to be one of the last things to return to normal.

So the initial thing about Omicron is that it delays that recovery in healthcare utilisation. So we're still not at pre-pandemic levels of procedures, and it's going to be a little bit longer now before we can start to think about that happening. So the initial things a bit more of a delay. In terms of more broadly, what it's done is it's reminding people that we're in a situation where we are just going to have to live with this virus and accept certain changes in the way that we all behave, but they don't need to be, need to be onerous in many ways.

Kyle: Do you invest in companies involved in the vaccine and antiviral drugs related to Covid-19, the likes of Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA)?

Paul: That's a really interesting question. The short answer is no, we elected not to do that. We did invest quite heavily into the diagnostic side of the pandemic, seeing that as a very clear area where there was an unmet medical need and we could identify rapidly the companies that were likely to deliver those products and services.

With regard to vaccines, I think the whole vaccine situation has evolved in a way that we wouldn't necessarily have expected. So if you go back and you look at some of the big world's biggest vaccine players, you know, Glaxo in the UK, Sanofi in France, for example, you would have expected them to be at the forefront of delivering this. And actually, they weren't. Their initial efforts floundered in this area. We've seen even companies like J&J deliver a product that wasn't very good. AstraZeneca, they weren't really a player in vaccines and they came from left of field.

So the market firstly didn't play out as we imagined in terms of participants and competition. And then secondly, I don't think anyone believed at the beginning that we'd be talking about giving people three or four shots of the same vaccine. I think we imagined that the vaccines would have to adapt and change over time continually like they do for the flu and that we may be looking at, you know, if we couldn't do one and done, we'd be looking at maybe boosters every two or three years. So the vaccine dynamic has been different to what we expected.

Some of those companies have done incredibly well. I think their valuations are personally rather challenging to understand. And then how this plays out over the next three to five years is similarly difficult to really recognise. So I think, particularly through Omicron, there was a lot of focus on will the vaccines work and everybody's measuring antibody levels and actually the correlates of protection didn't correspond to the ability to induce antibodies because the immune system is more complicated than that.

And I think it's going to be a while before we really know how durable the protection is from people who've been infected with multiple variants just because they've been unlucky and people who've been vaccinated with three or maybe even four doses in some cases. And so, that market remains difficult for us to sit there and go, we think we have an edge in terms of understanding this, and particularly when the valuations of these companies remain, they've come back a bit but they remain quite challenging. So the simple answer is no.

Kyle: As you mentioned, the share price performances of those companies, particularly Pfizer and Moderna, have done very well since well during the pandemic. Do you have any regrets not investing in those two companies?

Paul: I think if you're going to look after other people's money, which ultimately is what we do, you have to have a very clear approach that investors understand what you're doing. So we have a valuation framework and an investment thesis, and we don't deviate from that. And as I said, when the whole pandemic situation started, let's remember, MRNA vaccines were completely unproven technology back then, we couldn't have had an edge on how this is going to work.

We couldn't have known from a regulatory standpoint these emergency authorisations, the scale in which they were going to be done, the speed of which manufacture was going to be advanced. So had we have bet on these things, it would have been a bet. And I don't believe it's my job to make bets with other people's money, so we stick with our framework. And these things have not fallen into that framework and don't fall into it now. So no, I don't regret that.

I mean, clearly, it's made for a challenging environment for all healthcare investors, the extent to which what has worked and not worked over the last two years has been, you know, it's ebbed and flowed quite significantly. That's required a lot of moving about. I mean, that's just part of the job. But no, I don't regret not buying something that I couldn't have predicted was going to work and anyone who owned Moderna before, in late 2019, they couldn't possibly have ever imagined I think that this was going to play out in the way they did, or that Pfizer would have become a major player in in MRNA vaccines. Let's not forget that they bought that technology in from BioNTech (NASDAQ:BNTX), for example.

So where I think it gets interesting now is that the second generation antivirals from Pfizer and Merck (NYSE:MRK), they do offer the potential that we can really imagine future Covid waves possibly to be not more serious than dealing with the flu once these drugs are stockpiled and available, and that's a very, very exciting prospect as we think about living with Covid and moving to this endemic phase.

Kyle: Paul, thank you very much for your time today.

Paul: Thank you.