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Health-Care Picks for Portfolios

January 5, 2021 7 min 38 sec
Murdo MacLean
Walter Scott
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Text transcript

My name is Murdo MacLean. I’m a client investment manager at Walter Scott & Partners.

The question as to how the new vaccine for Covid-19 will impact big pharma and markets is an interesting one. I think, certainly, it’s appropriate to consider how it impacts the broader market primarily. I think big pharma’s relationship to that is obviously quite clear in that it is big pharma and health care more broadly that is playing a key role in the development and rollout of the vaccine. And, of course, the vaccine needs to be discussed in terms of there being multiple vaccines really. So, whether it’s the Pfizer vaccine or whether it’s the AstraZeneca one in the U.K. or a number of other ones around the world, including China and Russia and undoubtedly more, there will be a number of firms that have a key role to play.

You also have other companies such as Roche and others that are involved in the testing, diagnostic side of treatment as well, which will go hand-in-hand obviously with the project or the approach to roll this out and to ultimately seek to bring the virus under control. So, they will be very important in that respect.

I mean, I think in terms of looking over the course of the year, it’s interesting to note that whilst healthcare companies have performed quite well, and within our portfolio we’ve seen examples of that whether it be the likes of Roche or Novartis or indeed some of the other health-care businesses out there, they performed well.

But they largely performed well in the first half of the year where the traditional defensiveness of their businesses came to the fore, where investors were worried about more cyclical parts of the economy, more indebted sort of companies and businesses that were really very severely, directly impacted from the virus — they sought refuge in some of the businesses in the health-care space. So, from a performance standpoint they were an important part of our first half, and particularly Q1 amidst the heavy fall in markets. They’re an important part of our performance.

Thereafter, I think that they’ve, broadly speaking, performed as we would have expected. They’ve been reasonably positive contributors, but they have not led the market as it rose. And that, I think, is what we would expect. They continue to be, looking at our portfolio, very, very strong businesses that retain our confidence. When we consider the likes of Roche for example — Swiss, global leader in a number of areas, therapeutic areas, particularly in oncology as well as in diagnostics. You look at things like Novartis, a broad big pharma type, again with lots of exposure to different sorts of disease types. And then Novo Nordisk, which is a global leader in the treatment for diabetes.

These companies are exposed to all the unfortunately rising parts of the world in terms of diseases, but they are exposed to what you would consider to be the growth areas. They possess industry-leading positions, and all the profitability and strong balance sheets that you would assume they would have as well. So, we really are very positive on the exposure.

I think more broadly, when we look at what the vaccine means for the wider economy, clearly it is the oxygen that many sectors of the economy have been waiting for.

Having said that, it’s not going to be a sort of overnight switch that can be flicked on. As we know, this will take a number of months to roll out to the most vulnerable people in the population. And as we go through that process, the economy and the wider market will continue to see more benefit and more relief.

There are a number of very interesting non-pharmaceutical, non-drug-related businesses, which we are very optimistic on.

I wouldn’t say that 2021 is necessarily going to define those businesses. It’s not a make-or-break situation. These businesses have been invested in the portfolio for what we consider to be decade-plus growth opportunities. If I may select one or two, a business such as Edwards Lifesciences, which is a U.S. company, and they provide a minimally invasive approach to deal with a rather nasty disease called aortic stenosis, which is an issue to do with the heart.

The offering here from them is that, rather than go through open heart surgery, their approach is extremely low in terms of its intensity and burden on the patient. It can be done as an outpatient, and it’s relatively painless, relative to what they would have had before. So, it’s more about displacing the sort of standard of care today, and in doing so, improving the quality of outcomes and improving the patient experience. That business has a very, very long way to go before it becomes the dominant standard of care. And indeed, diagnosis of that disease itself is extremely low. So, there’s a huge opportunity there for Edwards to continue to grow into that space.

And that’s the sort of businesses that we like. Whether it be health care or other sectors, it’s that penetration story that’s driving the growth. You have a best-in-class product or service that is seeking to replace what is there at the moment. The Intuitive Surgical, which is the surgical robotic system da Vinci, which has been in portfolios now for seven or eight years. We think that still, arguably — some of the best years are still ahead of it. The proportion of procedures, surgical procedures carried out by surgeons still vastly outweigh or outnumber those that are carried out by the surgical robotic system, which is still operated by a surgeon but has a greater degree of precision involved in it. So, again, a big opportunity there for Intuitive Surgical.

And one of the newest holdings, which is interesting in terms of how we’ve been able to take advantage, I think, of some of the volatility in markets this year, particularly in the early part, with the addition of a company called Illumina, based out of San Diego. They’re the global leader in gene-sequencing technology. Now, when we think about long-term opportunities, it doesn’t really get much more long term than this. Today and for many, many decades, the approach by pharma has been to try and develop a drug that will go on to become a blockbuster.

That can be very lucrative, but for patients it’s rather hit-or-miss. Very few blockbusters can cure everybody. So, if you are the lucky part of the population that benefits from that, fantastic, but there are many cases where that’s not possible.

Where Illumina comes in is this transition from that sort of historical traditional approach to a more personalized medicine approach, whereby, we understand through the analysis of people’s genetic makeup what will work for them and what will not work for them. And without the tools that Illumina provides, that degree of precision in terms of personalization of medicine is not really possible.

We think Illumina’s growth is really measured in the decades from now, rather than in the single number of years. And so we’re very excited. And I think the opportunities for differentiated — particularly in the medical device space — differentiated therapies and treatments is still very, very rich ahead of us. And I think that that will continue to be an area where the research team at Walter Scott are finding good ideas.