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 But, when FDA asked for proof there was none so claims were withdrawn, says Bell-Irving.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.”

Do’s & dont’s

  • DO Look at what trial stage the drug is in, as well as the data. Make sure there’s proof the drug can do more than existing ones.
  • DO Examine company management, including experience and how it handles cash flow.
  • DO Beware companies run by the lead scientist. Often, they’re not business-minded and may run out of money before trials are complete.
  • DON’T Get carried away by hype. If in early trials the company claims it has a miracle drug, or they bring back a previously failed one claiming it now heals something else, be suspicious.

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.

Biotech industry stats

  • $937 million: Government expenditures on biotech
  • Spending on biotech represents 9.0% of total federal government science and technology expenditures
  • 2,104 full-time personnel dedicated to biotech
  • Source: Statistics Canada 2008/2009

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.”

It’s also important to look at management and structure. “Invest in a company with real science behind it, a real [drug] candidate, a real molecule to work with,” he says. “And then see if they have the capital to get through it.”

Company reports reveal how much money they burn each year. Use those figures to determine if it has at least two years of capital in reserve to cover operations.

Market cycles also play a role. “In 2008, healthcare companies had a tough time raising money. A lot of good [ones] failed because they ran out of capital.”

Today, Bell-Irving says healthcare is on the cusp of the greatest surge forward since WWII—when the introduction of antibiotics and other battlefield drugs into commercial use drove up stock prices—so he urges investors to get in now.

In the last six months, there have been a dozen different companies in the market with new drugs, and many more to come in the next year.

There are genome and stem-cell advancements. Today it costs a couple thousand dollars and takes a few hours to get a map of your genome, he says. By comparison, in 2005 it could cost $1 million and took months.

Further, some might think a second-generation cancer vaccine is a few years away, but in fact candidates are launching later this year.

He predicts the next phase of research will be personalized healthcare—mapping your own genome so doctors can prescribe tailored treatment for you.

“Up until several years ago, I was cautious because of the global problems,” he says. “Now I absolutely am looking to increase book size and client participation in healthcare.”

Suzanne Sharma is the associate editor Advisor Group.