Sometimes the winning formula for investing in healthcare is simply picking profitable businesses and avoiding binary bets on clinical trial outcomes.
This is the view of Vinay Thapar, co-chief investment officer for US Growth Equities and portfolio manager for the Global Healthcare Strategy at AllianceBernstein.
Below, Thapar (pictured) tells FSA how he approaches healthcare investing, how the strategy is positioned, and his outlook for the sector as a whole.
How do you approach investing in healthcare?
“The AB International Healthcare Strategy carefully selects exceptional healthcare businesses that have an opportunity to reinvest back into their business for future profitable growth.”
“While this may sound very sensible, the truth is that most of our peers in healthcare investing choose to focus on making binary bets on science and clinical trial success, rather than focusing on businesses that already offer commercially available and successful products on the market.”
“Given that the typical clinical trial costs US$1.5 billion on average, and has a typical success rate of only 8%, we find strategies that claim to specialize in picking clinical trial winners are not only fighting bad odds but also introduce a significant amount of volatility into an inherently defensive industry that offers attractive, profitable long-term growth.”
“We prefer to own businesses that are not only profitable but that also deliver better outcomes for patients, and that also can play a role in reducing overall healthcare costs – typically also positive for risk-adjusted returns.”
How is the strategy positioned?
“We tend to have an overweight in biotech companies, but exclusively in larger-cap biotech names that already have commercially available products on the market and have no exposure in small or medium sized biotech with no commercial products.”
“Our largest position is in big pharma, but we are always typically underweight given that many of these companies struggle to maintain growth, and of those that do, many achieve growth through inorganic acquisitions for which companies often overpay. We also own companies in managed care, diagnostics, and in medtech.”
“While we have had an underweight to life sciences and tools the last few years due to inventory digestion issues in China, there are signs these concerns are starting to fade. Once we identify attractive companies that can re-invest for future growth, that growth tends to be persistent, hence the low turnover of our strategy.”
What is your outlook for the sector?
“Healthcare as a sector has suffered the perfect storm of a post-COVID hangover of demand, higher utilization and lower margins for managed care, and weaker volumes from China for products like life sciences tools or vaccines. There have also been concerns over the Trump administration’s selection of Robert F Kennedy Jr as Secretary of Health and Human Services, given his controversial views on vaccinations.”
“However, we have seen quite a number of fundamental trends reverse, leading to analysts forecasting earnings growth for the sector that is stronger than that of the S&P 500, and continuing to offer high quality, while from a valuations perspective it is the 2nd cheapest sector (only energy is cheaper).”
“We also see little scope for revolutionary change in how healthcare is approved, delivered, or paid for in a US government context in the foreseeable future. Where there is more change is in how healthcare, as a consumer of AI as well as benefiting from a variety of key innovations, could see profound positive change that may reinforce and strength some already attractive business models.”
