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Long-term themes good for health and growing wealth · On The Money

• 0:03
  Kyle Caldwell: Hello, and welcome to on the money, a weekly bite sized show that aims to help you make the most out of your savings and investments. So in this episode, we're gonna be covering how investors can potentially make wealth out of health, to talk through key health care trends, valuations, and political risk. I'm joined by Jamie Douglas, is full manager of the Polar Capital Global Healthcare Trust. So, Jamie, the first long term health care trends I wanted to ask you about is aging demographics. There are certain health care companies that are tapping into the theme of the fact that we're living for longer.
• 0:45
  Could you firstly set the scene and talk us through this long term health care trend?
• 0:50
  Jamie Douglas: Yeah. Look, I think it's a really important question. So we're essentially talking about life expectancy here, aren't we? So if you look at The UK in the last fifty odd years, life expectancy has increased by about, you know, somewhere between eight and eleven years. If you look in The US and figures vary, but every day there's more than 10,000 US citizens turn 65.
• 1:12
  And the reason they track that is that they can then qualify for a government funded program called Medicare, and similar trends are occurring in emerging markets. So absolutely, there is a theme. And I think there's probably two important things to add. The first one is as we get older, we get more and more chronic diseases. And chronic simply means long term treatment.
• 1:31
  So that could be diabetes, it could be hypertension, it could be arthritis. But I think you also have to include things like dementia and certain cancers as well. And so as we navigate through that path of life, you get this acceleration of costs towards the end of our lives as we get 75 and beyond. So in terms of volume and demand for products and services, absolutely, you know, I I would wholeheartedly agree that demographics is an important thing.
• 1:59
  Kyle Caldwell: I'm assuming there's no shortage of companies tapping into this trend. Could you talk us through how you play the trends within the investment trust that you manage?
• 2:09
  Jamie Douglas: It's an important theme. Think one thing just to reiterate is we're not a thematic fund, but we do look at themes and we don't divorce these themes from from valuation and, you know, where we think you can make returns. But absolutely, we can do that. There's a bunch of sub sectors that will benefit from what we're talking about. There's essentially volume coming to the system.
• 2:29
  And so that could be diagnostic companies, it could be distributors, it could be facilities, and when I reference facility, I'm simply talking about a hospital. And then medical devices, the companies that make the devices that go into your body, they can all benefit from that theme of volume. And we can we can expose and we can invest in that. We can invest in those companies, absolutely.
• 2:52
  Kyle Caldwell: Within that theme of volume, could you pick out a couple of stock examples?
• 2:57
  Jamie Douglas: Yeah. Absolutely. So in The US, we have exposure to a specialty diagnostics company that specializes in colorectal cancer called Exact Sciences. We have across The US, Europe, and actually emerging markets, India specifically, exposure to facilities or hospitals. So we have a couple in The US.
• 3:19
  One is called Encompass, and we also have a company that specializes in imaging centers that's called RadNet. Here in Europe, we own a company called Fresenius SE that has a some hospitals in Germany, and then we also have exposure in India as well. So it's a global theme, and we're we're global. And so we're fortunate we can invest across the globe in that thematic.
• 3:44
  Kyle Caldwell: And how do you approach value in a health care company? I assume a lot of the companies that the growth focus, the promise and future growth. So how do you ensure that the future growth is not already overpriced?
• 3:58
  Jamie Douglas: Yeah. It's a really important question. I mean, we do have valuation discipline. I think it's important to say it's it's both art and science. So we look at standalone valuations.
• 4:07
  We look at peer group valuations. We also look at correlation analysis as well. But, ultimately, I think one of the most important things we do is try and figure out where the revision cycle is is going. Are revenue and earnings revisions moving in a positive direction? And if we can try and capture that, then that certainly will help us when it comes to to to valuing opportunities.
• 4:28
  Kyle Caldwell: The next long term health care trends I wanted to ask you about is ongoing innovation. So how do you approach investing in companies that are are addressing medical needs?
• 4:41
  Jamie Douglas: Yeah. That's a it's a really interesting point. I think the important point, just taking a step back, is that actually if companies can innovate and they can add value, then they can commercialize those assets. And once again, we draw an experience to come up with ideas where we think there are companies that are developing products or services or technologies that will meet an unmet medical need and could have commercial value. And that's when we really start to do our due diligence, know, we we we have a compliant network of experts so we can speak to key opinion leaders really to try and understand the patient journey, you know, how they come into the funnel, what's available today and where the future is.
• 5:18
  And then once we've gone through that journey, hopefully we've come to the end of anything actually this product or this service or this drug might have real utility and could drive long term growth for the company that's developing it and hopefully will commercialize it.
• 5:31
  Kyle Caldwell: Could you talk us through the types of companies and sectors that you're investing in within Dafine?
• 5:38
  Jamie Douglas: Yeah. So once again, it's incredibly diverse, but I think most people would focus maybe on biopharmaceuticals, that'd biotechnology companies and pharmaceutical companies that are literally developing the drugs. But also medical devices as well, they're going through a wave of innovation and we've got these new product cycles that hopefully, if the reimbursement's there, the demand is there, and they can execute, it can drive long term growth. So it's really across a bunch of subsectors, but for the point of this conversation, your direct question, I would probably say biotechnology, pharmaceuticals, maybe medical devices in three sub sectors.
• 6:14
  Kyle Caldwell: How do you approach investing in companies that try to cope with new drugs or innovations for diseases that don't currently have cures? Of course, a lot of the the drugs that that are trying to that are trying to solve these problems, they don't actually come to market. They don't work. So how do you how do you approach that scenario?
• 6:37
  Jamie Douglas: Well, the first thing we try and avoid is big binary risk. You know, we don't expose ourselves to, let's say, late stage clinical readouts that could create volatility. That's one thing we do try to avoid, you know, trying to figure out where the current valuation is and what the intrinsic value might be. So so so that's one point. But the second thing really is is about doing our own due diligence and really speaking to doctors and key opinion leaders about the patient journey.
• 7:04
  You know? I said it previously, but, you know, just to reiterate, they come into the funnel. They go see their physician. These are the current options for you. This is the current standard of care, you know, and are the next generation drugs or devices gonna add to that, and are they gonna be better, and therefore can they drive long term growth.
• 7:24
  And once we get to that point, hopefully, we get to the point we think actually this could be really, really interesting. Now clearly, doesn't always work. Drug development is very capricious by nature. Things do go wrong, but that really hopefully gives you a sense of how we approach that.
• 7:38
  Kyle Caldwell: Companies that are aiming to create new drugs to tackle obesity have been in the headlines over the past eighteen months, two years. In particular, there's two companies that have got a bit of duopoly at the moment. That's Eli Lilly and Novo Nordisk. I know that you you invest in Eli Lilly. I think it's the top holding in the investment trust.
• 8:00
  Could you explain when you first bought the company and your views on how it is on its on its weight loss drug program?
• 8:09
  Jamie Douglas: So I can't remember the surprise at precise time of the investment. It's it's at least three years ago for Lilly. And so Lilly has some commercialized assets in areas where there's large addressable markets, and so that's diabetes, it's weight loss management, areas like breast cancer, and autoimmune disease. And by autoimmune, think eczema and psoriasis things like that. So it's very very diverse.
• 8:36
  The other thing that they're trying to do is solve some some medical problems. So one might be, can I take a market that's predominantly injectable and can I have an oral alternative? And so that's something that we're also pursuing and they're also going for some kind of what we would describe as higher risk, higher reward areas like Alzheimer's as well. So that's the commercial base, quite diversified. They've got some interesting things in the pipeline.
• 9:03
  And then, you know, quite a well respected management team, been quite stable for a while. And so they're kind of some of the pillars really that we we looked at.
• 9:12
  Kyle Caldwell: You don't invest in Novo Nordisk, or I assume you don't because it's not in your top 10 holdings?
• 9:17
  Jamie Douglas: Full disclosure, we do have some exposure.
• 9:20
  Kyle Caldwell: Is it a stock that you've been looking at a bit more closely given the fact that from around its peak, I think eighteen months ago, it's it's fell off 50% or just over 50%. Is that therefore made it potentially now more attractive?
• 9:34
  Jamie Douglas: Well, the the precipitous fall has not gone unnoticed. They operate in similar markets to Lily as the point you made. They've got commercialized assets in the fields of diabetes and weight loss management. They're also interested in trying to pursue similar areas like an oral alternative and also potentially label expansions that might include something like Alzheimer's as well. So they have that.
• 9:57
  One of the difference maybe is a bit more turnover at the management level and certainly there's probably been a difference in the way the two have executed as well. But prima facie, they do the same things. They're just in slightly different places.
• 10:12
  Kyle Caldwell: I wanted to next move on to the political risk of investing in health care. Of course, Donald Trump is now back in the White House. There have been cuts to government sponsored research budgets for health care and threats to squeeze drug prices lower. So how do you attempt to navigate this political risk, or is it something that you just can't navigate because it's completely out of your control?
• 10:38
  Jamie Douglas: Well, health care is extremely diverse. And so if one looks at the key risks that might be associated with the administration, they might be, to your point, government funding, they might be tariffs, they might be drug pricing. So then can you look at areas that are maybe a bit more protected from that? And there are some areas that are, you know, domestic US businesses that might not have tariff risk and might not have pricing risk. So that diversity certainly helps.
• 11:03
  But the other thing, you know, one has to look at is then is is is political fear or the fear of policy change reflected in valuations. And I know it's history, so caveats apply, but sometimes when you invest in periods of high political uncertainty, you can generate collected returns. So the diversity is helpful, but also then we can't divorce what's going on really from from valuation. But actually, and, you know, touch words, we're not out of the woods yet. We are starting to see some signs that the political environment and the regulatory environment in The US might not be as penal as maybe we might have thought six to twelve months ago.
• 11:44
  So firstly, the the regulator in The US that approves drugs called the the FDA, and if you look at their approvals this year up to the September, they weren't that far off last year. The point being is that there's been a lot of rhetoric and headlines, but actually underneath, you know, that body seems to be functioning okay. So so that maybe gives us a bit of relief. And secondly, we are starting to see companies go to the administration to try and broker deals and craft deals that maybe protect them for some of the things like tariffs and drug pricing. The quids on the other side of that is they're having to invest in manufacturing in The US, but we are starting to see these deals being brokered, and and then so is some of that political fear lifting as well?
• 12:28
  And and we kinda hope it is. So you kind of add those two together, and hopefully, you can come up with a situation where the future might be a bit brighter now than it maybe would have been six months ago. And, of
• 12:39
  Kyle Caldwell: course, the political risk has been a headwind for the health care sector Yeah. Over past three years. It has been a difficult period performance wise for any fund or investment trust that's investing in health care. Could you talk through has there been other reasons why it's been a tough period? And could you then look ahead and could you give you, like, elevator pitch of why investors should have some of their exposure in a in a diversified portfolio to health care?
• 13:08
  What are the the long term persuasive arguments for investors to have some exposure?
• 13:13
  Jamie Douglas: Yeah. I'd love to. Thanks. So so in in terms of the first question, I think why has health care struggled so much on a relative basis really since the beginning of 2023? And there's kind of micro and macro.
• 13:24
  So on the micro side, I e, what's been sector specific, I think you've touched on a lot of already. It's concerns about the administration in The US. It's concerned around drug pricing. It's concerns around tariffs as well. And so that's really weighed on the sector.
• 13:41
  On the kind of macro side and on the broader market side, there's been quite a strong appetite for other sectors like AI and tech, and we think that that maybe we've been a source of funds for that. And if you look at fund outflows that would underpin that view, if you look at the relative weighting of the health care sector in The US versus the broader market, it's very very low relative to history and so that would also kind of add some sort of coherence to that argument as well. So I think there's kind of two reasons, one sector specific, one more broader. In terms of looking forward, I think when one has to would like to be a bit more constructive, I think the first thing is the fundamentals. You know, we operate an industry where there are new product cycles that are driving top line growth.
• 14:29
  There's innovation coming through. I think the number of approvals at the FDA in The US speaks to that. And, you know, recent results from companies point to this idea that actually there is demand and volume growth as well and really I'm referencing medical device companies. So the fundamentals appear to be in reasonably rude health. Secondly, as we touched on already, you know, we are starting and hoping to see some of the political fears lifting, you know.
• 14:57
  The US regulator appears to be functioning. Companies are brokering deals that might help them navigate drug pricing and tariffs. So that's the second thing. And then finally, you know, we believe that valuations are supportive. We know we are a bit unloved and hopefully a combination of those ingredients, those three ingredients can build a more constructive picture, certainly, than we've had for for a while now.
• 15:21
  Kyle Caldwell: So that's all we have time for today. Jamie, thank you very much for your time, and thank you for listening to this episode of On the Money. If you enjoyed it, please do follow the show in your podcast app. And if you get a chance, leave us a review or a rating in your preferred podcast app. We love to hear from you, and you can get in touch by emailing otm@ii.co.uk.
• 15:44
  And in the meantime, you can find more information and practical pointers on how to get the most out of your investments on the Interactive Investor website, which is ii.co.uk. And I'll hopefully see you again next week.