Opportunities in the Health Care Sector

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Opportunities in the Health Care Sector

Teresa McRoberts Senior Vice President, Senior Analyst, Portfolio Manager

Teresa McRoberts is a 35-year veteran of health care investing, portfolio manager of the Alger Health Sciences strategy, and head of the firm's health care sector team. She recently provided valuable insights into the coronavirus pandemic, its impact on the health care sector, and investment opportunities resulting from the virus. The call was hosted by Dennis Hearns, a senior vice president and divisional manager in our distribution organization. Dennis Hearns : Good afternoon, everyone, and welcome to our call. I'm really excited to be speaking to Teresa today because it's obvious that there is a lot going on in the world related to health care. On top of everyone's mind today is the coronavirus and it's stunning spread across the globe. What do we know about the virus today and how is the health care industry responding? Teresa McRoberts : Well, as you said, COVID-19 or the coronavirus is causing a lot of havoc in the market. Sadly we know very little about the virus except that it transmits extremely easily. But considering this was a total unknown less than six months ago, we actually are doing a pretty good job of learning about it and trying to figure out how to deal with it in my opinion. And there are enormous resources being devoted around the globe by private industry, by governments to try to find treatments, vaccines and diagnostics. Statistically considering how much money and how many people Please note, this transcript is from a call on April 13, 2020 and it has been edited for clarity and brevity.

are using different approaches, hopefully we're going to have some good news over the next coming month.

Dennis Hearns : Where in the health care sector might we find some investment opportunities as a result of the coronavirus? In other words, have you been able to really identify potential winners and losers? Teresa McRoberts : If you are someone who is currently on a prescription drug or a biologic product, you're going to keep taking your medicine. If you're diabetic, you need your insulin. And considering that if you're worried about getting really sick with this virus, you want to be really healthy so you have an even greater motivation to take good care of yourself and to stay on whatever medication you have. So this means the pharmaceutical industry has held up much better than other things, which are much more economically exposed. You have a prescription, your doctor can send it into your pharmacy, you can get it mail order to, you can go in your car through the pickup line, so you're going to continue to take your new medication. And we have seen that in the script trends for a lot of different products. Another area that we're seeing a big increase in is something called telehealth. There's been a slow, steady doctor adoption of people replacing an in-person visit with doing something virtually or on the phone. But with COVID, the government has put in temporary regulations, which actually encourage the use of telemedicine. And so more people now have access to it through their insurance plans. Even Medicare beneficiaries have access to it.

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Most people don't want to go physically into a hospital or a physician's office because they might end up sitting next to someone who's sick with this virus. So this is a great way to avoid that potential physical contact and enforce your social distancing. In fact, in the last few weeks, almost every physician I have talked to has stopped doing visits in their office physically and have switched all of those visits to some sort of virtual visits. It took a week or two, but a lot of them are doing it now and they're going to keep doing this until the lockdowns ease and people feel comfortable going back to seeing people in person. But I think once you let the genie out of the bottle of telehealth or doing some visits virtually, I think some people are going to keep doing it and physicians surprisingly are also very positive about it. So that's another very positive area. One area that we're going to see some short-term negative consequences in is elective surgeries. Many hospitals in areas with significant outbreaks have halted elective surgeries. You can't get a hip implant, a knee implant, even some cardiac surgeries, even cancer surgeries in some hospitals, and some areas have been stopped and there is no date for when these are going to restart. These hospitals need to know they are not crammed full of potentially infectious patients before they can bring a healthy person in to do an elective surgery. We're watching that and watching those stocks, but there's been a lot of movement both positive and negative across the entire space. Dennis Hearns : Well, now a large part of your role as head of the health care analyst team is providing idea flow and recommendations to the portfolio managers. What type of questions are they asking you as they try to navigate these unusual times? Teresa McRoberts : The number one question everybody wants to know is, when do we get back to normal? And I think it's probably going to take a little longer than most people think. That's not to say we can't unlock, but normal is what we did six months ago. I think that it takes a while to normal, requires a vaccine and that vaccines usually take a few years, but we will see a gradual return to normal for some activities. But until we have a vaccine, going to a crowded restaurant, sitting in a stadium with thousands of other people

shoulder to shoulder, it's probably not going to be something that most people are going to want to do and that I'm not sure the authorities are going to feel like it's safe to do. I think we need a vaccine and there's many, many people working on this. And once we get that, I think we will be back to normal. But until then, I think we're going to have incremental normal.

Dennis Hearns : What do you see as the main drivers of health care sector outperformance today?

Teresa McRoberts : The biggest thing is innovation. Health care has always been driven by innovation. What are the three rules of real estate? It's location, location, location. In health care, it's mostly innovation, innovation. And then at various points in times, it's also about politics or reimbursement or regulatory issues. But at the end of the day, the space has always been driven by innovation. And right now because of coronavirus, we've seen some shifts in innovation. People who didn't have anything to do with this virus because we didn't know about it a few months ago, are now already vaccinating people, treating people to see if they can deal with this. And that kind of rapid response and that ability to innovate is what makes this space so very attractive. Having an active strategy is also very important because a lot of the ETFs simply are passive strategies. You just get a handful of the bigger companies. So, if you want to innovate up and down small to large cap companies, it is really helpful to look at an active product. One of the things that, prior to coronavirus, there was a lot of fear about politics last year and what health care would do under a Warren or Sanders presidency and that caused the group to underperform. Now that the fears of that have dissipated when it looks like we're going to have Biden as a nominee, a more moderate person who has, seems to have a lot of respect for the value of innovation, that's a big positive for the group. So we're starting to see health care come back into favor. It's one of the best groups this year. And I am actually much more bullish than I have been in a long time on the outlook for the group

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As I said, as the industry has shifted attention to developing vaccines and therapeutics, I think we're going to get this virus under control and this is the way we get back to normal, more and better diagnostic tests, multiple therapeutics, multiple vaccines, and the only part of the stock market that's going to give you this as health care. This is where we're going to get the way we get ourselves out of this and then go back to focusing in much more mundane and routine things. Teresa McRoberts : Outside of what's going on with coronavirus, I feel like we've had so much innovation in the last few years. It's almost overwhelming at times. We're seeing exciting things that are coming out of everything from genomics to diabetes treatment to cellular and gene therapy and minimally invasive therapy. You want the most innovative thing when you are sick. We look at things like genomics where we see the ability for a patient who has cancer to have that cancer, that tumor sequenced. And so depending on what the sequence is, that tumor, there may be a drug that can make that tumor melt away. And that's becoming more and more common. There are other areas like diabetes. There's a million and a half people in the in the U.S. with type one diabetes who need insulin injections. There's a little device you can put on your body that's a little bit bigger than a quarter, a little sensor that you insert into your body and the abdomen. And instead of having to prick your finger, if you're a type one diabetic, you can read instead. This little sensor senses what your glucose levels are. You can read those levels on your phone. So if you're a type one diabetic, nobody has to know you have diabetes, they just think you're checking something on your phone and you can use that to control your diabetes in a much more rigorous manner. Share those results with your doctor, have alarms go to a family member if something adverse is happening to you. And it's a tremendous innovation. I could spend the whole hour talking about all the innovations and the different ways that you're seeing innovative things to help patients and help patients take care of themselves better. Dennis Hearns : You spoke of innovation. Where are you seeing the most innovation within health care?

Dennis Hearns : What other areas are you seeing that are contributing to your optimism?

Teresa McRoberts : The other thing that you need if you're going to be really innovative is you need a regulatory environment that's very accommodative, and the FDA has been very, very accommodative over the last few years. Probably six months ago, there was an article on the front page of many papers that said that the death rate from cancer had actually gone down recently, which is unheard of. And why did it go down? It went down because we have more drugs to treat cancer patients because the FDA has been extremely accommodative about streamlining the approval process and helping get those things out. And we're going to see this with the coronavirus. They are trying to figure out how to streamline what they need for a vaccine and a therapeutic. We're in a great environment right now with the FDA being as helpful and as accommodative as it has been. Dennis Hearns : Let's put on your portfolio manager hat now and turn to your health sciences strategy. What industries within the health care sector are your top weightings and why? Teresa McRoberts : Biotech is about a third, a little bit less than that. And pharma is about a quarter or a little more than that. And then I also have some, what I call health care equipment and supplies and tools, and that's about another third of it. With a little bit of providers. The reason I liked the biotech and pharma is, first of all, you play everywhere from the small emerging companies up into the big companies. Innovation isn't just in the small companies, that also happens in the big companies. The big companies can often be better at capitalizing on that innovation.

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Because of what has gone on in the last few years with the fear of Washington and drug pricing, actually pharmaceutical and biotech stocks actually came into the year at a very attractively valued in terms of looking at their P/E multiples relative to history. They'd underperformed for several years because of the fear of what Washington might do. There have been an extremely large number of new products. Last year or the year before the FDA approved a record number of in products and actually record times, so you have a very accommodative regulatory side and now that the political fear is certainly dissipated, after coronavirus, I think these stocks would be doing even better than they are now. I really liked that just because of the innovation. The equipment and supplies box, these are your steady Eddie companies. Your people who make pacemakers and things for your heart and hips and knees. As the population ages, we use more of these and we'll come back to using them again. We're not going to get younger, so we're all going to need these still. I've been a little light on the services, the managed care in the hospitals because for the last few years has been actually on the pricey side relative to historical levels. And I'm not exactly sure what's going to happen. I do believe there'll be ultimately some changes in Washington and I'm not sure these stocks are fully priced for that, although they're getting close to that. Our Heath Sciences strategy is a broad-based, diversified strategy. We invest in all caps. We invest in everything from therapeutics to services. I try to go to where I think the best innovation is because at the end of the day, the way you make excess returns in health care is you innovate. Innovation is all up front. There's lots of failures. But once you have a successful product, you have the right of being the first inventor, you have patents and everyone always wants the best health care that they can have.

Speaker Question : I see Biogen is potentially in your portfolio and there's a lot of speculation about their Alzheimer's drug. I was just curious your opinion on that. Teresa McRoberts : Yes. Biogen is definitely a risk reward on their Alzheimer's products. It is due to be filed any old time now, and once we know whether or not the FDA has accepted the filing and off, that will give us the first clue as to how the FDA feels about it. Alzheimer’s is difficult. We have very little to treat it. The trials were not perfect, but there's certainly some signal there. And this is one of these where you look at an FDA who's tried to be very accommodative, who's tried to go where the science takes you and certainly as a risk reward, there's much more reward for it being accepted and approved than there is downside. So as a risk reward, I think it's positive, but I fully understand that there is an extremely large bar around the stock in terms of where it could go both on the upside and the downside. As we get more data, I may change my view. Often in health care you have to go on a little bit of data and then as time comes along you get more and more data to either affirm your thesis or tell you that you were wrong. And when I'm wrong, I'm wrong and I'll deal with it. And if it affirms my thesis, it affirms my thesis. And this is what health care is, and so the way I try to deal with these kinds of things is I try to manage risk potential. I have a position that if I own something like this, I understand how much money I can move and I think very carefully about that. But I also think about what the risk award is in which ways skewed. And so, right now, Biogen is still skewed positively on a score wide basis.

Speaker Question : How much are you looking at as far as investments in companies who are trying to do the cure for this COVID virus?

Dennis Hearns : Great. Let’s open up the line to questions.

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Teresa McRoberts : There's the companies we know about and then there's the companies we don't know about. I have investments in some of the companies that are in the news a lot of that being involved in this. And then there's other companies where I certainly don't know. J&J was one a few weeks ago where they told us all that they are investing, that they're working on a vaccine. I wasn't aware of that until then. I think what we're going to hear as earning season comes along, I think we're going to hear about more and more companies discuss and disclose what efforts they have. I know there's going to be other health care companies, other pharmaceutical and biotech companies, that are going to discover that they too have an effort in something. I don't think it's one thing we need. If you look back at the history of AIDS, which is a virus, the very first products we had for AIDS were extremely crude. We'd probably look at them and cringe now and say, oh, they barely worked. That's true. They did barely work. But they were the foundation and the products kept getting better and better and better. And now HIV is no longer a death sentence. People live for years with HIV because we have such good products. I realize coronavirus is different in that regard. I think we need a variety of things. We need antivirals to give maybe somebody who's early in it and it's easier for an antiviral to deal with the virus before it's everywhere in your body. If you're just got a low viral level, it's a lot easier for an antiviral to tackle that viral load. We need products that treat all the various consequences that come from this disease. And there's dozens of things that we still don't know what all we need. It is not a drug. It is multiple drugs. It'd be great if there's an antiviral you can give somebody early on, but there comes a point where there's too much virus and you have to deal with the consequences of that. I think we're talking multiple drugs and I also think we could be talking multiple vaccines. And we just don’t know, we're going to have to see where the data leads us. Right now directly, I probably have about 10% of my portfolio in companies that you could say are directly trying to address COVID, but I know that there's other companies I own that over the next month or so as we

can get into earnings, they're going to talk about on their earnings call what their efforts are because every major company is going to be asked about it and I'm sure we're going to find there's a lot of companies. And that's great because we need as many shots on goal as we can to try to come up with as many things as we can have as quickly as possible. Speaker Question : I didn't get the percentage that you were allocated towards health providers and services. What were the percentages again? Also, you’ve mentioned that some of the elective surgeries aren’t being performed? Teresa McRoberts : In services, health providers and services is about 10%, health care equipment and supplies and what I call tools, that's about 30%. I do own some companies that are going to be affected by the halting of elective procedures over the next few months. These procedures will come back. I certainly cut some of those names back, but we will go back to having elective procedures. And I also own a few companies in the space where I don't think we're going to see much effect at all. And in fact are sadly a beneficiary of long, intense hospital stays. There's not a lot of those companies, but there are a few of them that will benefit. But even a company who sells a hip or a knee, at some point those procedures will come back and the stocks have gone down quite a bit. A lot of bad news has gotten priced into them. Specifically elective procedures, it's probably somewhere around 10% or 15% now because part of the rest of its stuff that is actually not as effective. If you think of something like I was talking about a diabetes sensor, a continuous glucose sensor that you put on your body, that's within a medtech and tools area, but it's not going to be affected by procedures. It's something that you use as an outpatient. You get a prescription for it; you get your refills of your sensors every month.

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There are things actually within that space that are not going to be affected by elective procedures because they're not an elective procedure. But I've been very careful. I've certainly cut back. It's not zero, but a lot of them have certainly gone down a great deal. And I'd also say that if you look at the projections from a month ago about how many beds we're going to need and how many people are going to die, we seem to be doing much better than that right now. There is a possibility that elective procedures might be able to come back a little earlier than we all thought a few weeks ago. This is an extremely fluid situation. I am listening to Andrew Cuomo’s comments every day and it feels to me like New York is maybe a week earlier or better. I don't exactly know how or what word to use, but things are getting better a little faster than people expected and we're hearing that in other parts of the country. So maybe elective procedures come back sooner. I will have to see where the data and the facts take us and we'll address that when we have a sense of where it goes. Teresa McRoberts : There's a couple of ways they can make money. The first one is if you are a large employer or you are a health plan you may contract with a telemedicine company. So that pre-COVID, which I know it's hard for us to remember, on one of the initial impetuses to use telemedicine was instead of you going to an emergency room on a Saturday morning because you don't feel well, if you can have a telemedicine consult in your home that keeps you at home instead of that expensive emergency room visit, it’s better. It's better for the health plan. It's better for the employer, better for you, because then you can do it in your home. If you have an a managed care plan, you may have access to telemedicine and that plan, depending on how they structure the arrangement, may pay the telemedicine company, for example, I'm just making this number up, a dollar per member per month so that you have that access. And then they may charge you a fee if Speaker Question : Telemedicine has certainly been a topic with the pandemic and the quarantine. How is it that telemedicine companies actually make a profit?

you use that or they may not. It's all about how your employer and your health plan wants to structure the benefit. The predominant way is they get enrollees because employers or insurers want to give people another option instead of that expensive visit to an emergency room. But over time it's evolved. There's some things that we found that certain demographics would prefer to do a mental health visit with the provider at eight o'clock at night when they come home from work rather than taking time out of their day. And that's become a source of revenue. Someone who's not sick per se but needs to go visit a doctor, a dermatologist because they have pink eye or something, it would be cheaper if they didn't have to leave their desk. If the doctor could take a look at their eye and say, oh yeah, you have pink, I'm going to write you a script. You've saved that person being away from their desk for an hour or two. There are also hospitals that often use the telemedicine technology to create their own. Cleveland Clinic uses someone there. They started with another vendor rather than try to make their own telemedicine and they've enhanced it to reflect them. Because you need these visits to be recorded in your medical records, there's a record of what said of what they told you, what they prescribed. So that's how they're generally paid. They're not paid for “I could just do this on Zoom or FaceTime,” they're actually not HIPAA compliant. The health plan, the employer, they need a record so they can understand there was a visit just like if you went to a doctor, there would be a record that you went to a visit. That's how they're paid. And there's a lot of excess physicians around. You may think, oh, we're short of physicians because of COVID. Actually, there are some hospitals that talk about they've emptied out their hospitals and they're waiting for their COVID patients, which may have a lot of doctors doing nothing. and so many of those doctors are happy to do telemedicine consults because it gives them a source of pay while they're waiting for either COVID patients to show up or for them to be able to go back to doing the orthopedic surgery, for example.

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Speaker Question : Can you talk a little bit about your investment process, specifically within the new world that we're in. How has your process changed? Are there certain aspects of companies that you're looking at more between the financial and growth profiles? Are there areas that you're emphasizing more or less than you were six months ago? And then if you could talk about how important it is for you to talk to company management today or even a sell-side analyst. Teresa McRoberts : Yes, the assessment process has definitely changed. I have spent a lot of time in the last month doing a lot of calls with as many people as I can to understand how coronavirus has affected things that I never thought about being affected. How does this unlock, how do we go back to behaving and what's going to change? A lot of things I think in general will change, but a lot of things in health care will have to change and they will change. I'm spending a lot of time trying to not just think about what's happened, but what happens in the next month until we get to a point where everybody's feeling comfortable about going out and about like they did six months ago? I think we're going to see changes in the health care system and part of it will depend on who's elected and how and what happens over the next few months as to whether we have a second wave that’s even worse than this wave or is the next wave more controlled because we figured out how to deal with it. In some sense, I have to wait and see how it happens and how it evolves and to try to draw lessons from it. I have added more pharmaceutical companies to my portfolio. They have business models that are fairly defensible. I've talked to doctors who said during COVID, I don't want to use product A, B, and C. Instead I want to use products X, Y, and Z just because of how certain things make patients less able to fight off a virus like this. That's a very good thing to know. So I changed my portfolio with some areas. I've added some more pharmaceuticals. I've added some of the companies who are going to investing and dealing with COVID.

COVID is not going to be a something that's gone in a month or six weeks. It's still going to be around and we're going to have to deal with it. And I think it's going to be around for a while. So I certainly want to invest in companies that are going to address that. But I'm also trying to think about if people are going to do fewer in office visits, even after this is all over, who’s going to come up with a way to get us the information that we need. Is there a way to take a blood pressure reading virtually, something that a patient can get at his house? These are things that we need to figure out. I'm talking to management; it's hard right now. Just because they're health care companies doesn't mean they have any better idea than we do about how this evolved. They all know where they need to help find a cure. But that doesn't mean that they understand how bad can it be or have we seen the worst. We're just going to have to wait and see. It is very fluid and I will change things as I feel are appropriate. I have some companies I've owned for a long time that I think are actually very well positioned into this and I'm quite happy to own them, but I've certainly made some changes on the margin and trying to think about how things will evolve.

Dennis Hearns : Thank you for your time today, Teresa.

DISCLOSURE

The views expressed are the views of Fred Alger Management, LLC as of April 2020. 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 Fred Alger Management, LLC. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities. 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 healthcare 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. Past performance is no guarantee of future results. This material is provided for informational purposes only and is not meant to constitute medical or healthcare advice. Please consult a doctor for medical information. 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 authorized and regulated by the Financial Conduct Authority, for the distribution of regulated financial products and services. FAM and/or Weatherbie Capital, LLC, U.S. registered investment advisors, 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 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.

Important information for Investors in Israel : This material is provided in Israel only to investors of the type listed in the first schedule of the Securities Law, 1968 (the “Securities Law”) and the Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Law, 1995. The Fund units will not be sold to investors who are not of the type listed in the first schedule of the Securities Law. The following positions represented percentages of assets under management as of 1/31/20 for the Alger Health Sciences strategy: Biogen, Inc., 1.85%; Gilead Sciences, Inc., 0%; Johnson & Johnson 0%; Regeneron Pharmaceuticals, Inc., 0%; Moderna, Inc., 0%; Apple, Inc., 0%; and Zoom Video Communications, Inc., 0%.

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