Despite delivering positive returns, healthcare underperformed the broad market in the first half of the year. Portfolio Manager Andy Acker explains some of the reasons why – as well as why he is optimistic about the sector’s outlook.

Key takeaways:

  • A market rotation into economically sensitive sectors weighed on some areas of health care earlier this year, as did concerns about potential drug pricing reform in the US
  • As a result, the sector now offers attractive valuations relative to the market.
  • Meanwhile, innovation is accelerating, with new health care delivery models being rolled out and breakthroughs occurring in areas such as gene editing and precision oncology.

Andy Acker: So, health care performed well but lagged the broader markets in the first half of the year, and, I think, really a couple of drivers: Despite the central role that the health care sector played in driving a COVID recovery, the biggest beneficiaries as viewed by the market are other economically sensitive sectors. And so, we have seen a sector rotation after 2020 into some of those more economically sensitive stocks. That being said, there are parts of the health care sector that have really benefited as well, especially medical device companies, health care service companies and life science tools companies have performed well. And pharmaceutical stocks are also starting to, have started to get a bid in the first half, really as part of a rotation into more value stocks.

The sector, I think, remains depressed in terms of valuations relative to the broader markets, and there are several drivers there. One of the big ones is still concerns about drug pricing and political rhetoric around that. Even with the recent and very controversial approval of Aduhelm for the treatment of Alzheimer’s disease, which represents a huge, unmet medical need but was a very controversial approval where the FDA decided to give an accelerated approval despite, I think, what many believed were mixed clinical data. And that and the high price that they decided to charge for that created more controversy again about drug pricing.

So, I think there are several elements that have been holding back the sector. That being said though, we think the innovation in the sector remains alive and well, and we remain extremely excited about the outlook. These stocks still trade at a substantial discount despite what we see as accelerating innovation addressing high, unmet medical needs. One of the most recent examples, and I think a real breakthrough, was the first in-vivo gene editing approach. And this means we are actually changing a target gene in a person and actually knocking out a harmful protein. And this one just recently showed that we could reduce this harmful protein by 87%, on average, with a relatively low dose of a single infusion.1 So, I think this is an important breakthrough, but really just one of many that we are seeing in the sector.

We are seeing tremendous advances and new modalities of treating human disease. Gene editing is one of them, gene therapy is another. We are seeing advances in precision oncology, monoclonal antibodies that can be engineered to attach chemotherapy drugs and act as precision-guided missiles that directly target cancer cells. We are seeing ways of knocking down proteins using a small molecule or a pill called protein degradation, and we are starting to see advances there.

And, of course, biotech is just one area where we are seeing advances. Even in health care services, we are seeing new value-based models that find ways of treating patients with better service at lower cost, and we are seeing a number of new models there. In medical technology, we continue to see advances in terms of diagnostic treatments. Of course, we have seen advances for COVID-19 diagnostics, but we are seeing that in many other areas as well, especially in diabetes where we can now read a person’s glucose on their iPhone every five minutes without any finger sticks. We can see advances in robotic surgery as another example. Ways of controlling blood pressure using medical devices. So, really, we continue to see advances across the health care landscape, and we think ultimately this will drive tremendous value to the sector.

 

Source:

  1. Intellia Therapeutics press release, 26 June 2021

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