Faced with pricing pressure and regulatory changes, the healthcare sector is in the hot seat. But, as Alessandro Valentini says, “We see that as a big opportunity,” especially because these aren’t new issues.
Valentini, a fundamental portfolio manager at Causeway Capital Management in Los Angeles, Calif., explains that “the biggest driver [of downward pricing] has been consolidation from the buyers.” That means drug manufacturers, such as those whose products treat diabetes and respiratory diseases, can no longer raise prices year after year.
When it comes to his portfolio’s pharmaceutical holdings, he looks for companies that exhibit two characteristics: diversification and innovation.
An example of the former is Novartis. “Novartis is a large pharmaceutical company, but it’s also one of the leaders in terms of generic manufacturing,” says Valentini, whose firm manages the Renaissance Global Markets Fund. “They own Alcon, which is a leading business in ophthalmology, and they also own a significant portion of a [joint venture] with GlaxoSmithKline in consumer health.”
To identify innovation, Valentini looks at a company’s pipeline. “Pricing pressure is less of an issue for companies that are bringing drugs to the market that are truly innovative,” he says. “Roche is a great example of that.”
A Swiss company that makes drugs to treat cancer, Roche can “deliver very attractive pipeline compounds […] that will allow them to be less exposed to pricing pressure,” he says.
Valentini also points to the U.K.’s AstraZeneca. “This is, again, a leader in immuno-oncology with an attractive pipeline across several areas,” he says. “The pressure in terms of pricing will be significantly less [from] other companies that might introduce follow-on drugs.”