The health care industry was mired in uncertainty for much of
last year as markets reckoned with President Obama's Patient
Protection and Affordable Care Act. But 2011 tells a different
story for this vital sector. Although the S&P 500 has put up a
respectable 6.7 percent gain this year, the MSCI World Health Care
Index has returned 12.7 percent and the Nasdaq Biotech Index has
advanced by 16.6 percent. But health care and biotech are
notoriously difficult industries to assess, even for professional
investors. We spoke with Sam Isaly, managing partner of OrbiMed
Advisors and portfolio team leader for
Eaton Vance Worldwide Health Sciences
to learn about opportunities in this challenging sector
Where does the health care industry stand after the President
Obama's health care reform?
We run a worldwide health sciences fund, not just a US-focused
fund, so it's important to understand the global context. Several
macroeconomic factors contribute to the sector's growth
worldwide-an aging population, growing wealth and technological
advances. Given these factors, health care spending will grow at a
faster rate than the global economy.
There are a few critical time periods to keep in mind. Roughly
speaking, a broad range of industries reached their stock market
peak around Sept. 30, 2000. From that date through March 2010,
health care shares worldwide underperformed the market, though they
did advance. Part of that underperformance was driven by concerns
over the development of health care architecture in the US and
whether there would be changes to the health care system.
About 80 percent of Americans currently have health care
coverage, and the bill will add an estimated 30 million Americans,
which will bring the coverage to about 90 percent. That will have
an impact on demand. The legislation that was passed last year
expands coverage, but there's precious little cost control. That's
both good and bad. In the short term, we're going to have increased
demand unaccompanied by price control. But price control is
inevitable in the long term. Investors have to be watchful, as the
situation could sour in the US.
As a counterpoint, China has no health insurance industry of
consequence. But the Chinese political structure has made it a
priority to bring better health care to the countryside. We
anticipate that there will be highly positive developments in China
and even India that should counterbalance negative developments in
the US. Health care is very much a worldwide sector.
In regards to changes to the US health care system, we
anticipated a relief rally would occur after President Obama signed
the new legislation. This rally did not transpire immediately. The
health care sector continued to underperform the market from March
through the end of 2010. The S&P 500 gained roughly 15 percent
last year, while the health care sector gained about 1 percent.
However, it became apparent at the start of 2011 that a rally was
What are some of the most exciting developments in the
We are on the cusp of realizing the promise of genomics that was
first manifested in dreams about two decades ago. It's taken longer
and cost more than predicated for this to become a commercial
reality, but now it's at hand. DNA sequencing has become easy and
inexpensive and will revolutionize our lives over the next decade.
The price will drop to about $1,000 in a few years, and it will
change the world.
For example, cancers are nothing more than genes that stimulate
uncontrolled cell growth. If we can identify the mutation, or
polymorphism, we can design a therapeutic that specifically
addresses the uncontrolled aspect of the gene.
The most dramatic example of this is a drug called Gleevec, sold
). Gleevec treats BCR-ABL leukemia, which is caused by a disorder
of the BCR-ABL gene. Gleevec is one of the first drugs that
specifically targets a genetic fault. It's turned this type of
leukemia into a controllable, chronic disorder rather than a
rapidly fatal disease. DNA sequencing will do the same for other
cancers and disorders.
Sequencing can tell you what disorders you're most likely to
suffer from, and even provide an expected timeframe for y our
death. I had my DNA partially sequenced for $500, and the results
suggest that I will die in my 90s from a heart attack. I've since
modified my behavior by taking baby aspirin and Lipitor to reduce
) is the world's most efficient gene sequencing firm and boasts the
biggest market share. The technology is changing rapidly, and
Illumnia faces some risk from competition, but the stock was the
biggest contributor to our increase in net asset value last
There are other applications of this technology. For example,
the management of a pregnancy typically involves an amniocentesis.
The large needle required for this procedure disturbs the fetus and
there's a small chance that the test itself could cause a
miscarriage. It's now possible to take a quantity of maternal blood
and tease out the fetus' DNA sequence to discover if the child may
have a condition such as Downs Syndrome. No more amniocentesis,
nothing more than a vial of blood, and a major advance for
families. That test, which is still pending approval from the Food
and Drug Administration, uses the Illumina DNA sequencer and was
developed by one of our holdings
How would you respond to investors who view biotech as too
We concur that there's volatility in that sector, but we have
the skills to separate the wheat from the chaff. If you want to
participate in the next new thing you need to move into unproven
lands and take risks.
However, our fund's beta is less than 1, which means that our
fund is less risky than the broader market, despite its investments
in biotech. One reason for the low beta is a worldwide spread of
investment that reduces our exposure to individual countries and
individual themes. In addition, we moderate our position sizes for
company risk. Novartis is our biggest holding at 6.8 percent of
assets. Only 1.9 percent of the portfolio is invested in Illumina
and 0.5 percent in Sequenom. Sequenom loses tens of millions of
dollars every year, Illumina makes tens of millions and Novartis
makes multiple billions.
What's your investment case for Novartis?
The firm has a market value of over $100 billion. Big pharma
faces a wave of patent expirations, and while Novartis does face a
patent cliff, it's manageable. The company's research productivity
has been remarkably strong; it's been atypical for a major
pharmaceutical firm. The company produces drugs, generics,
vaccines, consumer products and truly represents worldwide health
Novartis has a new drug for multiple sclerosis (MS) named
Gilenya. It's the first pill for MS and it's rapidly being adopted
around the world. There are currently about 13,000 patients who
treat MS will Gilenya, and we expect that figure to grow to 20,000
by the end of the year. Gilenya costs about $40,000 per year, which
means an exit rate of close to $1 billion in the first 12 months
after the drug's introduction. This drug is on its way to becoming
a multi-billion dollar product.
Novartis didn't discover this drug; the firm licensed Gilenya
from the Japanese company
Mitsubishi Tanabe Pharma Corp
(Japan: 4508). We've devoted 5 percent of our portfolio to
Mitsubishi Tanabe, which will receive a big royalty from Novartis.
We expect Mitsubishi Tanabe to perform even better than
You also hold shares of insurers such as
(NYSE: WPT). What's the investment case for health insurers?
Health insurance companies collect fixed premiums. But the bad
economy has reduced the number of physician visits and elective
surgeries. This means the cost of health care claims to the
insurance industry has also fallen. Fixed premiums and fewer claims
lead to soaring profits. Hard times for the world, or hard times
for the workers in Detroit actually mean great times for health
We made a sector call. We own
(UNH) and WellPoint. About 10 percent of our portfolio is devoted
to health insurers and we're sitting on a year-to-date gain of
about 40 percent.
What are the risks to investing in the health care sector
There are political risks. Health insurance schemes worldwide
are in deficit. Budgets are being broken in many countries. There
may be extreme risk in each individual company. I could list five
companies in my portfolio that have extreme stock-specific risk.
There is a competitor to Sequenom that we're worried about. But we
know where the company stands and will know before the next guy if
that competitor becomes a threat to Sequenom.
There's no doubt that the health care sector will grow at a
faster rate than the global economy. But that doesn't make it a
slam dunk for investors. Health care is a technologically-based
sector that's difficult to understand. An investor can certainly
build a sensible health care portfolio on his or her own, but it's
difficult and time consuming. I'll self-servingly quote the ads on
television that say, "don't try this at home," and proselytize for
the benefits of a specialized health care fund.
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