There is more to healthcare than pharmaceuticals and biotechnology, argues Dani Saurymper. That has been the Axa IM Framlington Equity’s fund manager’s message for investors since taking over management of the Health fund in April 2015. The £542.2m fund is currently underweight in pharma, with 29.9 per cent versus the benchmark MSCI World Health index weight of 47.6 per cent, particularly when it comes to large cap names.
Roche is still the fund’s largest holding at 5.2 per cent. Medical device firm Medtronic is also a top 10 holding at 3.6 per cent. In August the fund added to Philips, ahead of its reclassification as a healthcare stock by FTSE in December as it sheds its non-health operations.
Politics, along with M&A, may be one of the key drivers of short-term performance in the sector, but Saurymper says he expects pharmaceuticals to suffer pricing pressure regardless of who is in the White House.
“We’re seeing concentration of power in terms of managed care operators [a type of medical insurer] and pharmacy benefit managers [third-party administrators of prescription drugs]. They’re able to exert pressure on the drug manufacturers, both pharma and biotech,” he says.
Differentiated lifesaving, life-transforming medications will still be able to receive a premium price and that’s why the fund is more positively exposed towards innovative pharma and biotech, says Saurymper, who originally studied pharmacology because he had the “rather idealistic dream” that he wanted to “find a cure for cancer”.
In contrast, as US healthcare costs push 20 per cent of GDP, companies that can take cost out of the system should get rewarded, says Saurymper. These include the managed care operators and pharmacy benefit managers mentioned above, as well as IT and administration solutions.
The fund isn’t invested in on-demand remote medical care company Teledoc, but Saurymper says it is a theme that he is keeping an eye on and working out how best to play in the fund. Around a tenth of the one billion physician visits in the US each year are for cough, cold and flu, he says, although up to a third of these could be treated by telehealth, according to Teledoc. “If you could avoid clogging up the physicians office, or worse the emergency room, and get diagnosed over the phone, there are real cost savings in there.”
A relief rally in biotech, where the fund is overweight, has seen the fund rally 7.5 per cent since Donald Trump won the US election in November, compared to 2.6 per cent in the MSCI World Health index. Saurymper points out pharma, where the fund is underweight, has underperformed during the last four US rate rise cycles. The most obvious beneficiary of tightening monetary policy is managed care, he says. “They collect premiums so they have a large cash pile. If interest rates go up they should get a better return on their portfolios.”
The fund has been positioned for tinkering rather than dramatic changes in US healthcare legislation. “It will probably be less comprehensive than originally envisioned by Trump and Republicans.” Saurymper points out that the Congressional Budget Office is yet to publish updated projections of the impact, particularly on future numbers of uninsured Americans. He says the Senate is likely to make significant changes to what was passed by the House. Hospitals could be vulnerable and in turn capex, such as x-ray machines or robotics surgery devices with price tags upwards of $1m, but Saurymper says it is unlikely to change the way the portfolio is structured.
M&A is one area where Saurymper feels “nervous” about his underweight in pharma. A wave of clinical data on the emerging immune-oncology treatments is set to come out of Merck & Co, Bristol-Myers Squibb, Roche and AstraZeneca in the second half of 2017 and early 2018 – the outcome of which is expected to determine M&A activity. “Cancer is potentially no longer going to be the fatal disease that everyone associates it with and actually it will become much more of a chronic disease that we live with and are able to manage,” Saurymper says of the pioneering new treatment, which targets a protective cloak that cancer cells develop, allowing the body’s immune system to go in and attack.
Bristol-Myers Squibb’s share price has recently been volatile as Merck appears to have taken the lead in this area. Commentators have predicted AstraZeneca data could prompt a further 10 per cent move in share price. Already this month its stock jumped more than 9 per cent on unexpectedly positive trial data for a lung cancer drug. Bristol-Myers Squibb could move five to 10 per cent, while Merck and Roche are predicted to move no more than five per cent.
Trump’s tax repatriation policies could be a further catalyst for M&A. “As a group you would expect the small to mid-cap end of the spectrum to be the beneficiary. That’s not to say there shouldn’t be large-cap M&A,” Saurymper says.
The fund hasn’t sought out likely acquisition targets or high-taxed US companies, pointing out there’s no guarantee the policy will get through, he says. “We’re buying good companies that have good US exposure and should there be tax reform that would be an added bonus.”
Taking a longer-term view of healthcare, Saurymper says emerging markets have much more room to increase spending. “If you took the two most populous countries in the world today – India and China – they spend roughly 4 to 5 per cent of GDP on healthcare. The other extreme is the US. They spend about 18 per cent and the average for the OECD is about 8 or 9 per cent.”
“You don’t necessarily have to invest in an emerging market to access emerging market growth,” Saurymper says, noting that 68.6 per cent of the fund is in US companies. He points out approximately a fifth of revenues at US company Becton Dickinson are from emerging markets, while at French firm Sanofi it’s up to a third. Only 1 per cent is directly allocated to emerging markets. “We work quite closely with our emerging markets desk on some of the Asian hospital companies like IHH or Bangkok Dusit. So hospital operators in affluent areas with large populations,” Saurymper says.
Besides innovation and emerging markets, ageing populations and lifestyle disease – such as obesity, diabetes and respiratory disease – are further long-term drivers of growth in healthcare.
Complications connected to obesity alone mean increased demand for heart valve replacements, dialysis treatment and hip and joint replacements. Non-alcoholic fatty liver disease, linked to cirrhosis of the liver and caused by poor diet, is thought to impact 40 million adults and 7 million children in the US and is “very much a silent killer”, he says.
Innovations aren’t just therapeutic. Big data and healthcare IT are areas of the sector that Saurymper is excited about, pointing out these areas are really in their infancy. Dexcom has developed a device that monitors diabetics’ glucose levels and can notify patients via their smartphones of changes that may be of concern. “Treating someone for hypoglycemia is potentially very serious so if you can avoid that altogether that’s great. Better management can lead to better symptom management and care over the long term.”
2001 Joins Goldman Sachs as an equity research analyst focused on European pharmaceuticals
2010 Departs from Goldman Sachs for global healthcare sales at Nomura
2013 Becomes an equity research analyst for Barclays, covering European healthcare
April 2015 Joins Axa Investment Managers as manager of the Axa Framlington Health fund
29.9% Allocation to pharma compared with 47.6% in the index
10% Possible AstraZeneca share price move depending on immune oncology clinical data results
1% Fund’s direct allocation to emerging markets
£542.2m Assets in the Axa Framlington Health fund