Health Sciences Update
HEALTH SC I ENCES / Q&A
Health Sciences Update March 2020
CONVICTION AND OPTIMISM AMID MARKET UNCERTAINTY
Market volatility has surged as governments across the globe take dramatic actions to stem the coronavirus pandemic. In this timely Q&A, Teresa McRoberts, a 35-year veteran of health care investing, provides important insights regarding the impact of the virus on the health care sector. Before we dive into more general information, can you please update us on the markets and the coronavirus? The main issue causing so much turmoil in the markets is all of the uncertainty surrounding the virus.We know very little overall about the virus, except that it is easy to transmit. But we still do not know how long it can live on different surfaces or whether a person can develop a natural immunity to the virus following recovery.We hope that the virus will largely die out in warmer weather as does the flu, but we don’t know yet. A lot of the country is under soft quarantine right now and we don’t know how long this will last. There are many more questions than there are answers, creating uncertainty in the market and consequently the big market drops we have seen. The good news is that there are a lot of people working on this now, so things like testing are getting resolved. Are any vaccines in our near future? They are beginning to test vaccines; however, there are still many outstanding questions and issues. Vaccines are somewhat controversial and research efforts have declined over the past few years. Our vaccine capacity worldwide is geared to making influenza vaccine. There is no excess vaccine capacity, so trying to make a new vaccine will require new, costly infrastructure. Since this is a new vaccine, it is likely that at least two doses will be required for immunity. So we would need billions of doses and creating capacity on that scale is not easy.Would a vaccine be a one-time thing or an annual vaccine (like influenza)? That changes the economics in terms of upfront investment. Given all the challenges, any early vaccine product would be focused initially on being used in health care workers and those at risk because of underlying medical conditions or age. Producing enough for routine use in everyone is several years away. Where in the health care sector might we find some investment opportunities as a result of the coronavirus? Have you been able to identify any potential winners and losers? One area that will suffer in the short term is elective surgeries. Hospitals in areas with significant coronavirus outbreaks have started halting elective surgeries and there is no projected date for those procedures to resume. Similarly, people will not want to go to a hospital where there may be infected people to get a procedure if they could wait a few months until the coronavirus fear has faded. In general everyone that is involved in procedures will suffer from losing those elective surgeries. The benefits from treating coronavirus are much less for the companies that are losing those surgeries. On the other hand, if you are taking prescription products or drugs, you are going to continue taking the medication. For example, diabetics will continue needing insulin. This has resulted in the pharmaceutical industry holding up better than other industries more exposed to the negative economic consequences of the shutdown. Another area that might see an increase is telehealth companies. Though there has been a slow, steady adoption and receptivity to
Teresa McRoberts S EN I OR V I C E PR E S I D EN T S EN I OR ANA LYS T POR T FO L I O MANAG E R
Our positive outlook stems from three main areas: innovation within the sector, the regulatory environment and the current political climate.
telemedicine over the last few years, nowmore people have access to it through their insurance plans, including Medicare recipients, and with the added desire to avoid congregating in areas with sick people, we will likely see adoption increase. Further, the federal government has been making access to telehealth easier over the last few weeks to keep potentially contagious people out of hospitals and physicians’ offices. Lastly, an area of question is managed care companies, which may benefit from the reduction in elective procedures; with people putting off elective procedures, insurance companies do not have to pay for them, so their medical cost trend will be lower. However, it is unknown howmany people with commercial insurance will lose their jobs and therefore their employer provided insurance, meaning managed care might lose a significant part of their membership, presenting another area of uncertainty. This will mostly have an impact in the short term, but it may present a potential investment opportunity. Back to the overall markets, do you think that investors might be overreacting? The overall fear coming from the uncertainty is sparking this extreme market reaction. On the one hand, large parts of the economy, including supply chains, have for the most part shut down with no clear criteria for letting us return to normal. We have a large economy of people who for the most part are not working; they are no longer getting paid or only getting partially paid. So the concerns are certainly valid. The effects of the shutdown will take time to resolve; the economy may be slower as social distancing restrictions will need to continue for the near future. We are using the weakness to add to favored positions and new ideas that might be better positioned to benefit from the changes that will come from the shutdown. In addition, the Federal Reserve’s aggressive actions and the legislation coming out of Congress will likely mitigate the worst economic effects of the shutdown. Is there a light at the end of the tunnel or any positive take on the outlook? The good news is that for the people who get sick from coronavirus, they’ll either be mildly ill or they can get well with some modest therapy. Testing has finally started rolling out. People that need to get tested may get tested now and they can begin working through the backlog. Based on other countries, about 80% of those with the virus can be cared for at home—if they even get ill. Deaths seem to be concentrated in the elderly with pre-existing medical conditions. The purpose of the social distancing is to prevent younger people from transmitting the virus to an older person, for whom this could be very serious. Further, it will help prevent our hospitals from being overwhelmed by coronavirus patients, as hospitals do not have much excess capacity. I believe that drugs to treat the virus could be coming in the coming months or even weeks. This would likely calm the market down. Why is the health care sector a good investment in the current environment? In 2019, health care underperformed the broad stock market (as represented by the S&P 500 Index) and we believe this is due to the uncertainty that surrounded politically charged issues regarding insurance and pricing. After a slow start in 2020, health care is back in favor; we are more bullish than we have been in some time as we head into the second quarter. Our positive outlook stems from three main areas, the most notable of which is innovation within the sector. We are now also seeing promising signs from both the regulatory environment and political climate. Also, with the recent panic/fears of economic slowing, health care is likely to be viewed as defensive since most people continue to use health care even with a slower economy. While we generally think of a sector that is non-correlated to the overall market, when economic fear rises like now, many look to it as a place to preserve capital. What do you see as the main driver of health care sector outperformance today? Innovation is rapidly accelerating throughout the market and particularly in the health care space. This is what makes an active and diversified strategy so attractive—you can
There is innovation everywhere in health care. Innovation is becoming a standard of care. There are many areas that are exciting
avoid investing in companies that are not innovating and you can direct your assets into high-innovation areas, such as biotechnology and pharmaceuticals.
Where are you seeing the most impressive innovations within health care? There are many areas that are exciting to me within health care today, including: genomics, diabetes treatment, gene/cellular therapy and minimally invasive therapy. Innovation is becoming the standard of care. One of the most notable examples is in our understanding of the human genome. Companies are using genetic information to assess and select therapy for cancer patients. If patients are initially treated with a drug that matches the genetic cause of their cancer, they are more likely to respond to treatment and possibly avoid the cancer spreading. Do you have any examples that you can share? One specific example is in the BRCA1 gene, which signifies a genetic predisposition to breast cancer. This was popularized recently by Angelina Jolie when she announced to the world that she underwent a double mastectomy because she carried this gene. At Alger, we invest in a range of companies within this genomics sphere, from the companies creating the tools that help discover these abnormalities, to the diagnostic testing companies that test people for these on a regular basis, and finally in the pharmaceutical and biotech companies that are working to find cures for these deadly diseases. Are there any other innovations in the health care space that are compelling? Another example of innovation involves diabetes treatment. In the U.S., there are over 1.5 million people with Type 1 diabetes who are reliant on insulin injections. There are an additional 25 million people with Type 2 diabetes involving patients who are resistant to insulin and around 4 million people globally with Type 2 diabetes who require multiple daily injections of insulin. In the past, Type 1 patients had to prick their fingers approximately six times per day to test their blood glucose levels. Each one of those six fingersticks provided patients with a single point in time glucose reading. However, now new technology has been developed that allows for continuous glucose monitoring (“CGM”). These are sensors that a person can wear to measure glucose levels on a real-time basis. This eliminates the need for the regular finger pricks and even further, provides constant and trend-related information about internal blood glucose levels, as these fluctuate throughout the day. As an additional benefit, CGM will use audible alarms to alert the patient should he need to address his glucose levels. These advancements allow diabetes patients to live more full, normal lives as they don’t have to constantly worry about their glucose levels. What else are you seeing that is contributing to your optimism? Over the past few years, the FDA has been ramping up its approval process. It has been fast-tracking new drugs and therapies and granting approvals at a record pace. This accommodative environment has led to more drugs and more treatments coming to market quicker than they have in years past, further accelerating growth and innovation. We expect this pace to continue in the first half of 2020 and possibly thereafter as well depending on the results of the election. There is always a good amount of political risk within health care, particularly in an election year. However, in our view, the fear of major changes created by political rhetoric has mostly been priced into the most exposed health care stocks (pharmaceuticals, biotechnology and managed care). In the first half of 2019, when certain popular democratic presidential candidates were proposing single payer systems, health care significantly underperformed the broad market. Since Biden looks to be the Democratic nominee, the fear of government overreach has dissipated and once the virus fears lift, we expect to see health care outperform the broader market. Is there any concern that the political climate could cause the health care sector to underperform the market?
and they fall into “unmet needs.”
What drives health care is innovation, which aligns with Alger’s experience and expertise.
Innovation is occurring throughout the market spectrum. What makes innovation in the Health Care sector different? Innovative companies have traditionally produced earnings growth that exceeds expectations, may support higher valuations, and have the potential to produce outsized returns. However, innovation is not guaranteed, so performance of companies can vary widely. By using our bottom-up research process, we seek to identify the most innovative companies that are most likely to rapidly grow their earnings. As an example, mid cap size pharmaceutical companies tend to have newer and more innovative treatments than large cap companies. Smaller companies are therefore more likely to generate strong earnings growth. In some instances, we benefit from finding companies that are responding to changes in demographics, such as aging baby boomers’ increasing demands for health care. What differentiates Alger and how you invest in health care companies? We are experienced investors who know the language and nuances of health care and science. The members of our five-person team have an average of 22 years of experience and I have been investing in health care since 1994. With this experience comes confidence that allows me to impart my skills and knowledge to my team members, helping them become better investors. The health care team has a very deep understanding of their respective subsectors of health care. Everyone spends significant time researching companies and understanding what innovation is coming along that may be a major breakthrough.
The views expressed are the views of Fred Alger Management, LLC (“FAM”) and Alger Management Ltd. (together with their affiliated entities“Alger”) as of March 2020.Alger has used sources of information which it believes to be reliable; however, this publication is not intended to be and does not constitute investment advice.These views are subject to change at any time and may not represent the views of all portfolio management teams.These views should not be interpreted as a guarantee of the future performance of the markets, any security, or any funds managed by Alger.This material is provided for informational purposes only and should not be considered healthcare advice. Please consult your healthcare professional for medical advice. Risk Disclosures: Investing in the stock market involves risks, and may not be suitable for all investors. Growth stocks tend to be more volatile than other stocks as their prices tend to be higher in relation to their companies’ earnings and may be more sensitive to market, political, and economic developments. A significant portion of assets will be invested in health care companies, which may be significantly affected by competition, innovation, regulation, and product obsolescence, and may be more volatile than the securities of other companies. Private placements are offerings of a company’s securities not registered with the SEC and not offered to the public, for which limited information may be available. Such investments are generally considered to be illiquid. Active trading may increase transaction costs, brokerage commissions, and taxes, which can lower the return on investment. Performance data quoted represents past performance. Past performance a not a guarantee of future result. Investors whose reference currency differs from that in which the underlying assets are invested may be subject to exchange rate movements that alter the value of their investments. Important Information for US Investors: This material must be accompanied by the most recent fund fact sheet(s) if used in connection with the sale of mutual fund shares. Fred Alger & Company, LLC serves as distributor of the Alger mutual funds. Important Information for UK and EU Investors: This material is directed at investment professionals and qualified investors (as defined by MiFID/FCA regulations). It is for information purposes only and has been prepared and is made available for the benefit investors.This material does not constitute an offer or solicitation to any person in any jurisdiction in which it is not authorised or permitted, or to anyone who would be an unlawful recipient, and is only intended for use by original recipients and addressees.The original recipient is solely responsible for any actions in further distributing this material and should be satisfied in doing so that there is no breach of local legislation or regulation. Certain products may be subject to restrictions with regard to certain persons or in certain countries under national regulations applicable to such persons or countries. Alger Management, Ltd. (company house number 8634056, domiciled at 78 Brook Street, London W1K 5EF, UK) is authorised and regulated by the Financial Conduct Authority, for the distribution of regulated financial products and services. FAM is a U.S. registered investment advisor, serve as sub-portfolio manager to financial products distributed by Alger Management, Ltd. Alger Group Holdings, LLC (parent company of FAM) and Fred Alger & Company, LLC are not an authorized persons for the purposes of the Financial Services and Markets Act 2000 of the United Kingdom (“FSMA”) and this material has not been approved by an authorized person for the purposes of Section 21(2)(b) of the FSMA. The S&P 500 Index is an index of large company stocks considered to be representative of the U.S. stock market. The Cass Freight Index measures the volume of freight shipping in North America. Investors cannot invest directly in an index. Index performance does not reflect deductions for fees, expenses or taxes. All information regarding firm history, biographies, and Fred Alger Management, LLC (“FAM”) and Weatherbie Capital, LLC performance are maintained by FAM. Alger uses The Global Industry Classification Standard (GICS®) for categorizing companies into sectors and industries. GICS is designed to meet the needs of the investment community for a classification system that reflects a company’s primary business model as determined by its financial performance. FactSet is an independent source, which Alger believes to be a reliable source. FAM, however, makes no representation that it is complete or accurate.
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