John Bell-Irving, BSc, FCSI is an investment advisor at Macquarie Private Wealth. His background is in kinesiology, and he has more than 15 years of experience in healthcare investing. His expertise is providing clients with high-growth opportunities in biotech research.

Healthcare was always a topic of dinner-table conversation for John Bell-Irving. With a doctor for a father and head nurse for a mother, he couldn’t escape it.

So, upon becoming an advisor, he used that knowledge base to specialize in healthcare investing.

His clients at Macquarie Private Wealth fall into two categories: retirees with 20% to 30% of the equity portion of their portfolios in healthcare stocks; and 30-to-50-year-olds for which 50% to 70% is in healthcare stocks. The remainder may include government or corporate bonds, and REITs to ensure the portfolios generate cash flow.

For the younger group, he focuses on superior growth investments in U.S. biotech.

“A lot of companies have one, two, three products going for [U.S. Food and Drug Administration] FDA approval,” says Bell-Irving. “They have potential for huge returns if they’re successful, but you may lose 80% if they’re not.”

Why the U.S.? It has the largest healthcare industry, with more companies and opportunities. By comparison, Canada’s market is smaller and lacks government support for R&D.

Europe was an excellent candidate until five years ago, he says. Now he only holds GlaxoSmithKline, a big pharma in the U.K. that pays a steady 5% in dividends.

Sometimes, clients get carried away with product hype. Companies can easily talk up a drug that might tackle obesity—a problem U.S. government agencies estimate costs $190 billion yearly. The question is, will it work?

Cold-FX gained popularity several years ago on claims it could cure the common cold. But, when FDA asked for proof there was none so claims were withdrawn, says Bell-Irving.

“If you look at the actual data, a lot of [companies] deserve every accolade,” says Bell-Irving. “Some don’t because there’s less substance to what’s behind the story.”

To gain FDA approval, companies must go through four trial phases, including a preclinical evaluation. Investment risk is always highest in the early stages, but so are potential rewards. However, the actual success rate of getting approved is one-in-twenty.

“It’s about the same ratio as trying to find a new mine,” Bell-Irving jokes.

To get FDA’s nod, trial data should show the new drug does more than existing treatments. For example, Pfizer failed to find a replacement for Lipitor, for which it lost its patent last year. While the new drugs worked, they weren’t any better. As a result, Pfizer’s profit declined 19% this year, but the company’s stock price is rising on its promises of reinvention.

Bell-Irving spends a lot of time scaling back client enthusiasm, and focusing on what a new drug will do, to accurately analyze potential returns.

This is where technical understanding gleaned at the dinner table and diligent research comes in handy.

There are three biotech giants in the U.S. that offer the opportunity to get in on blockbusters (drugs that come with a $1-billion market): Amgen, Celgene Corp., and Gilead Sciences Inc. Bell-Irving recommends holding some of each because they’re relatively cheap, have multiple licences so they’re not reliant on any single drug, and are set to release new drugs.

Still, blockbusters don’t happen every day, so he advises clients not to overlook drugs geared to markets in the $150-million to $500-million range.

Aside from biotech and early-stage pharmaceuticals, clients should invest in medical devices, healthcare providers, and large pharmaceutical companies.

“Big pharma is slow growth but has good defensive qualities and nice dividends.”

He adds, “But to see large, double-digit growth from that sector is not realistic in the near term.”

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