A Wave of Innovation
NEW THERAPIES, AGING POPULATIONS BODE WELL FOR HEALTH CARE INVESTORS
The implementation of the Affordable Care Act (ACA) has brought renewed attention to the health care sector. In this Q&A, Janus Global Life Sciences Fund Portfolio Manager Andy Acker discusses the sector's prospects for investors.
In your view, what are the dominant trends in the health care industry?
AA: We are seeing an acceleration of innovation in the biotechnology sector. Thirty-nine new drugs were approved by the FDA in 2012 - the most in 16 years. One major reason for this is a dramatic reduction in the cost of genetic analysis. The first genome was sequenced in 2000. It took 13 years to complete and cost $3 billion. Today a human genome can be sequenced in just a few days for a few thousand dollars. Genetic analysis allows a much better understanding of the underlying basis of disease, enabling more-targeted therapies addressing specific genetic defects.
Six of the seven largest biotech companies are in the early stages of major new product launches. Biotech products generally have 10-plus years of patent life, which means they can drive improving profitability for many years.
Another trend is a greater cost-consciousness permeating the system. The ACA has led to reimbursement cuts, implying that everyone will have to make do with less. As a result, there?s a higher bar for getting new therapies reimbursed. Insurers and other payers in the U.S. and elsewhere are no longer paying for "me-too" treatments. Companies are focusing on addressing unmet medical needs, and that is improving the productivity of their R&D.
We have two key investment themes for the Fund. The first is companies that are addressing high unmet needs. We believe these should do well even in a difficult reimbursement environment. The second is identifying companies that make the health care system more efficient and help to lower costs. We feel that both of these fit well with the new environment under the ACA.
What does the aging of the Baby Boomers mean for investors in the life sciences sector?
AA: Health care spending has grown faster than GDP growth for the last 30 years in all developed markets, not just the United States. One reason is innovation - the demand for new therapies addressing unmet needs. The other is aging. People over age 65 spend more than three times as much on pharmaceuticals as any other age group. We expect these two drivers to continue for many years to come. And in developing markets, we believe the spread of wealth should lead to higher health care spending as well.
Beyond cost containment, what other impacts do you foresee from the ACA?
AA: The Act imposed fees and taxes on insurers and other life sciences companies to pay for expanded coverage. We expect new health care exchanges to bring more patients into the marketplace, offsetting the impact of those fees and taxes. The big question is how many new people will become insured. For many companies in our portfolio, the impact should be relatively muted.
There's much innovation in biotech, but also a great deal of volatility.
AA: Absolutely. For some companies, a failed clinical trial or regulatory setback can bring a stock down 50 percent or more in a day. We have a process in place to identify these types of vulnerable companies and limit our position so that the impact of a downside event like this on the portfolio is 1 percent or less.
While this is a health care-focused fund, it's highly diversified within that sector. We're balanced across the four subsectors - biotech, pharma, medical devices and health care services - and across different market caps and geographies. This balance has helped the Fund maintain lower volatility than the S&P 500 over the last five years. Our fundamentals-based approach is driven by a team of five dedicated senior analysts, most of whom have scientific backgrounds, so we can dig into the science behind new therapies. And we spend a lot of time talking to key opinion leaders in every therapeutic area. We see the Fund as a long-term investment with the goal of outperforming our health care peers and the broader markets over the course of an economic cycle. Our fundamentals-based approach aims to outperform not only broad-based funds, but also those focused on the health care industry. For those who are concerned about rising health care costs, this fund offers a way to participate in the industry growth as an investor rather than as a consumer.
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