Polar’s Pinniger: A letter from San Francisco

Pinniger David Polar

January sees a huge number of companies, venture capitalists, private equity and public market investors descend on San Francisco for the annual JP Morgan Healthcare Conference.

Held every year for the past 32 years, this massive event is attended by thousands of the world’s leading healthcare executives and investors and provides an important forum in which the investment mood among healthcare specialist investors can be assessed and calibrated for the coming year.

In advance of the meeting there was unquestionably a buoyant mood after last year’s strong returns for the healthcare sector and the event emphatically lived up to expectations. The meeting confirmed our view that over the coming few years a phenomenal new product cycle is set to drive strong cash flow generation for the industry; platform technologies are truly coming of age; and the pipeline of new product opportunities is full to bursting point. Our confidence in the long-term future of a global industry facing tremendous challenges and opportunities in equal measure remains undiminished.

Lasting the best part of the week, the long days are crammed full of company presentations and meetings and are a test of stamina and concentration. Investors rush between venues to catch up on the latest developments of companies held within portfolios, and potential new investments are scrutinised. For corporates, business development discussions are progressed, new relationships started and existing ones cemented. Participants rarely have a moment to soak up the warm Californian winter sun. This year was no different, and the barrage of positive news releases on clinical development updates and deal-making activity between companies drove the usual high levels of share price volatility for those concerned.

The meeting is heavily-biased toward the biotechnology industry, which has its spiritual home in California. With the sector’s renaissance well underway as a phenomenal new product cycle generates billions of dollars of revenues for companies successfully developing transformational new drug therapies across multiple disease areas, this year investors appeared hungry to identify those earlier-stage companies best positioned to replicate the extraordinary successes of the larger-cap names over recent years. With multiple biotechnology tools and technology platforms coming of age, we believe earlier-stage companies have the potential to deliver strong returns for investors over the coming few years.

As a team, our investment focus within the area of biotechnology is on companies developing truly innovative new drugs in the areas of cancer, genetically inherited diseases, and liver disease. In medical devices, diabetes management remains a growth area, and we favour companies with products or procedures that both improve clinical outcomes and reduce the overall cost of delivering healthcare interventions to patients in the hospital environment.

One of the emerging areas that excite us most is digital health. With surging advances in information technology in recent years, the era of ’big data’ is already revolutionising the quest to understand the complex biology involved in health and disease; and new products and devices are already helping to transform the way individuals’ health is measured and managed.

We expect the healthcare sector to perform well in 2014 due to its defensive growth profile in what could be a choppy economic and stock market environment. With the combination of millions of US citizens enrolling in healthcare insurance plans this year under the expansion of Obamacare, and improving economic conditions, healthcare spending growth is forecast to accelerate in 2014.

Over the long-term, we expect the way in which healthcare is delivered in all major markets will change profoundly given the demographic trends that most investors are no doubt well versed in. With inefficiency perhaps the defining common attribute of healthcare systems around the world, we are focused on identifying and investing in those companies that are best positioned ultimately to achieve more for less – and the key attribute to achieving this is innovation.

David Pinniger is manager of the Polar Capital Biotechnology fund