Long-term prognosis for Health and Biotech | December 2015

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  • 38 mins 10 secs
Robert Bailey, Head of UK Wholesale Distribution talks to Linden Thomson, Fund Manager of the AXA Framlington Biotech Fund and Dani Saurymper, Fund Manager of the AXA Framlington Health Fund. Thomson and Saurymper look at the health and biotech sectors discussing the sustainability of higher prices and some of the challenges faced by threats to the sectors.

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ROBERT BAILEY: Hello and welcome today’s AXA Investment Managers webcast. I’m Rob Bailey, Head of UK Wholesale Distribution at AXA Investment Managers. And today I’m joined by Linden Thomson, Fund Manager of the AXA Framlington Biotechnology Fund, and Dani Saurymper, Fund Manager of the AXA Framlington Health Fund.

Today, we’ll be covering off the sector as a whole, looking at a number of different areas of innovation, looking at some of the healthcare legislation that we’ve got to deal with, as well as some of the potential drawbacks of investing in a sector which has performed very strongly over the last few years. As always we’ll welcome your questions. You’ll see on the browser in front of you if you’re watching this live that you’ll be able to submit a question and we will do our best to answer as many of those as we can during the course of today’s webcast.

First of all, let’s just take a look back at the fund performance. We’ll start with the AXA Framlington Health Fund. As you can see over the last five years that fund’s grown by over 130% relative here to the sector4 Worth bearing in mind of course that this is the R share class, which is 150 basis points. But the Z share class, which is 75 basis points, obviously will have had a slightly enhanced performance. But where we’ve seen dramatic outperformance really has been in the biotech sector, particularly over the last three years.

Linden took over the management of this fund in 2012, and Linden since then the biotech sector has been particularly strong, your fund obviously has outperformed that4. What have been the key drivers to the strength in the sector?

LINDEN THOMSON: I’d say the three key drivers is firstly the growth that we’ve seen in the sector. The second is innovation that continues going forward as well. And the third has been just that it’s become far more investible for a more generalist investor base. So if we look at the growth, you know, these large cap companies have been posting 20% plus growth in a market environment of close to 0%. And the operating environment has been very supportive for these companies. Their underlying businesses have grown well, but then they’ve had some successful R&D (Research and Development) which has led to some really good execution in terms of new product launches. As I said the operating environment is a lot more supportive from the FDA (Food and Drug Administration) and the EMA (European Medicines Agency), those bodies that approve drugs.

Secondly in terms of innovation, you know, that’s where I’m particularly focused for this fund. I think that that’s the long term growth engine for the sector, and that as I said has, they’ve performed strongly with a lot of products coming through the pipelines and onto the market. And then finally just talking about the investability of the sector, I really feel I’ve said this a few times now, that the sector has come of age over the last two or three years. You’ve now got really credible large cap profitable growth, cash generative diversified businesses, alongside the more binary small cap nature that people expect for biotech.

ROBERT BAILEY: Yes, biotech as a sector has advanced massively over the last several years, but I guess the question a lot of people will be asking is can that continue? Are we at a stage now where we’ve seen such massive growth we can’t expect those trends to be carried forward? What’s your view on that?

LINDEN THOMSON: A good question. I mean I think that the growth we’ve seen over the last three years has been driven by fundamentals. And interestingly if you look at the expansion of P/Es outside of biotech they’ve actually been a greater extent than the biotech sector itself. So these companies really have grown into their multiples. Now having said that we’ve had a virtual circle of good R&D, good product launches really supporting the last two or three years. Can that continue? Now I expect the next two years for the sector to be growing at about 15%; that’s down from the high of 20% previously. But that’s because we’ve had such success that they’re growing from higher basis now; however 15% is still good strong growth in a low growth environment.

So I do expect the sector to do well from a fundamental driver. You’ve got the demographic tailwinds, which I think Dani will speak to more going forward, which supports the whole of healthcare not just biotech. And as I’ve spoken about, even now we’re going to talk briefly more about it in the next few minutes about innovation, I think that that will be increasingly important. In an environment where we’re talking about drug price risk etc, those companies that can produce compelling drugs with good efficacy in high unmet medical needs, true innovation will be those companies that can highly price their products, and they will be used.

An example of this is Vertex which we hold in the fund. That introduced one of its first drugs to treat the underlying causes of cystic fibrosis earlier this year. And in the 3Q financial results they reported 35% penetration in one quarter on the market, despite a $200,000 plus price tag. So these drugs that really do treat unmet medical needs, and really do bring efficacy to these patients, really still will be used despite high pricing. So I think that that will be increasingly important going forward.

ROBERT BAILEY: And Dani, sorry, you operate in a much broader field within the healthcare sector. What are the drivers that you see for the future?

DANI SAURYMPER: Yes, so as Linden alluded to, demographics is clearly a big tailwind for the whole sector. You’ve got ageing populations. You go back 30 years people were living to an average age of 70; they’re now living to an average age of 80. You take China just as a market, but the proportion of patients over the age of 60 between 2010 and 2040 is going to more than double from about 12% to 34%1. So as you get older you consume I call them units of healthcare, whether it be going to the hospital or taking medication, you’re going to consume more as you get older. And then the third most, well there’s two other important I would say factors driving momentum, driving demand for products, and that increasing existence of lifestyle diseases.

There’s some horrible statistics now out there in the world which tell you that the number of obese versus malnourished, the obese outnumber the malnourished by two-and-a-half to one now, which is quite a scary thought. I think we’ve nearly got 20% of, or certainly nearly a third of the US population are now classified as obese. And with obesity you also have a high risk of diabetes, so there’s about 400 million diabetics in the world today; that’s predicted to go to 600 million in the next 20 odd years2. So there’s huge drivers of demand for healthcare driven by ageing populations, lifestyle diseases, and then the final piece of the puzzle is looking at economic wealth, and particularly in emerging markets.

So there’s a very nice statistic, if you take the two most populous nations of the world, India and China, they spend roughly about 4 to 5% of GDP on healthcare. If you took the US that number is a whopping 17%3, and in fact the US spending on healthcare is the equivalent of Germany’s entire GDP. So over time you would

expect, certainly as these developing emerging markets become more higher growth, higher value economies, they will consume more units of healthcare, and all those three factors will certainly continue to spur demand.

ROBERT BAILEY: And just coming back to one of the points you made a moment ago Linden, you were talking about the cost of the drugs for cystic fibrosis, and the fact that despite those high costs they’ve still had a great deal of success in one quarter. How sustainable are those high prices? Is this something you can see biotech companies in particular in your sphere maintaining as we go forward?

LINDEN THOMSON: That’s the big question for the sector going forward. I mean obviously the issues that we’ve had in the last two months in terms of the volatility seen in the sector, I know we’re going to move onto that going forward, but has been about the sustainability of drug pricing. And I think that it’s possible for those products that are innovative, treat unmet medical needs, don’t have any competition, and are a medical necessity essentially for patients. Some of these, the pricing is related to the ultimate patient population, you know, these rare disease assets where there’s only 500 patients in the world, or 1,000 patients in the world can more highly price these products.

So there’s a lot of statistics and data, pharmicoeconomic arguments that go into things. But where I think the companies are going to struggle, and what we’ve seen in some of the speciality pharmaceutical companies, is where there’s then ‘me too’ drugs, there’s no differentiation. You’ve got payers who are becoming more and more aggressive in the US. You heard about how much the US is paying for their healthcare. They’re going to have to try and bring that down somehow. And so those areas where there’s very little differentiation, there’s going to be much more scope for the payers to play those off against each other and bring pricing down - which is why I’ve alluded to the fact that this first in class, best in class is going to be more and more important going forward. It’s been important, but in this kind of political environment, and a more cost conscious environment, that’s going to be more and more important.

ROBERT BAILEY: In the past we’ve spoken a lot about patent cliffs and the likes, how important is that in the biotech sector?

LINDEN THOMSON: So it’s important for those companies that don’t have biological drugs, because they still have a traditional patent cliff as such. They’re very easy to copy the day that their patient goes they’ll probably have numerous competitors on the market. It’s still unsure how the patent cliff for biological drugs is going to play out. We’ve just had the first drug launched in the US at a 15% discount. So that doesn’t seem like it’s going to drive the kind of patent cliff that we all expect from the pharmaceutical industry. They’re much more difficult to manufacture. How the FDA really see these and how they’re going to approve them is still up in the air, so that’s all to play out over the next two or three years. But I certainly don’t expect it to be as harsh a drop in revenues as we saw in the pharmaceutical sector for those biotechnology drugs.

ROBERT BAILEY: Well let’s move on a little bit and talk about valuations and where we are now. Dani, we’ve got two charts here showing the valuation of the MSCI health market. Talk us through these and what are these telling us?

DANI SAURYMPER: I’d probably draw you more to the one on the right first and foremost, which is just the broad global healthcare sector versus the global market. And I strip out financials just because the volatility obviously we’ve seen through the credit crunch. And it’s more to highlight historically this is a sector that has traded at a premium to the market as high as nearly 30%. And where we are today, we’re roughly about maybe a 15% premium to the market. So I wouldn’t have said that valuation of the healthcare sector is particularly demanding today. And what I would also draw attention to is if you look in the early ‘90s, and that really was the last innovation wave that we saw in this industry where we saw as many as 45, 50 drug launches in a single year. This is a sector that has capacity to rerate quite measurably if, and I firmly believe that we’re on the cusp of another innovation wave. And just as an example of that 2015 looks as though potentially it could be the highest year on record for new drug approvals in the US market.

ROBERT BAILEY: I mean that’s really interesting. We’ve had a question here which is asking about what do you expect to see as the new innovations, the new products and drugs and deliveries that are coming through. What do you see there that gets you excited at the moment?

DANI SAURYMPER: Yes, I’ll let Linden talk maybe more about some of the potential cures on the horizon, sort of gene therapy and things of that nature. My sphere is global healthcare, so it’s not just biotech. And the levels of innovation let’s say are a bit more incremental. But a good example I like to think of, and it may not be the most obvious, is a company called Becton Dickinson. And they’re involved in medication delivery. And one of the things they’re trying to do or introduce is connectivity. And that connectivity is between the pharmacist and the hospital when they prescribe the drug. That then is communicated to an infusion pump by the patient’s bedside.

So what that allows you to do is (1) you reduce cost in the system, because the nurse themselves doesn’t have to do the setup time so to speak. But more importantly it reduces medication errors because you’re still not, well currently you’re reliant upon a manual input into the infusion pump to set the exact parameters. The pharmacist should be able to and should be driving that piece of the information and communicating with the machines. So it doesn’t sound dramatic, but there are huge savings to the system that can be generated. And obviously the cost of healthcare is a big issue, and here’s an opportunity for a company to take that cost out of the system potentially.

ROBERT BAILEY: And do you see, another question we had about generics and me too type products, do you see that as a threat or is that another potential opportunity within the sector for you?

DANI SAURYMPER: Yes, I mean the pleasure of being able to invest across the healthcare arena, and we’ll talk about it maybe later on, one of the key ideas in the fund, in the health fund is a company called Hikma who are a Jordanian generics company but are soon to be the number two manufacturer of injectable generics in the world. And Linden can talk to you I’m sure about biosimilar or biogeneric companies that we’re focused on as maybe looking at an opportunity to exploit the impending patent cliff in the biotech arena. But in the US market you’ve already seen very high penetration of generics; over 80% of generics in the US, 80% of drugs in the US are using prescribed generics. But there’s huge opportunity in other areas of the world, not just the US market, where generic penetration is still very low. And obviously that is going to be important, and there are a number of key companies that are players in that market. Companies like Teva, companies like Novartis Sandoz, and as I mentioned one of the names in the fund is Hikma.

ROBERT BAILEY: And Linden, on the biotech side, what do you see on the horizon that is exciting for the fund?

LINDEN THOMSON: Two big themes that I’m playing in the fund through multiple stocks is gene therapy. So that’s building on the huge advances that we’ve seen in genetic sequencing, and the cost coming down for that, and our understanding of the genetic bases of diseases. And essentially gene therapy is the ability to replace a mutated gene, so conditions that are caused by a single monogenic disease, so single genetic mutation, the ability to inject. For example one of the stocks we’ve got in the fund is Spark Therapeutics, which is treating inherited forms of blindness in children.

All of these children go on to become blind, and it’s caused by one mutation in a particular gene. You get an injection in the eye that replaces that gene, well an injection in both eyes, and these patients at three years have much improved sight. We still need to see how long that lasts, but the chances are that you’re essentially curing these children of blindness with one injection. So the opportunity there is huge. There’s still questions on how you price these products, on the regulatory side of things. Side effect profiles have hindered this in the past, so are we beyond that? I think so, but that’s still to come. So we’re still early but Spark may well be the first company to have a US approval in 2016. So that will be a big landmark for the area.

So that’s one key area. The other one I would probably highlight that I’m playing is people always ask me what’s the next hot therapeutic area after hepatitis C. We’ve seen that Gilead do so well on the back of that, now launched the biggest selling drug of all time. And I would say that the next one is NASH, which is a liver condition that’s essentially caused by obesity. We’re playing into that theme that Dani talked about earlier in terms of the increasing obesity levels. And it’s essentially a similar outcome for your liver as if you drink too much, but it’s caused by fatty liver and obesity. And the number of patients that that potentially impacts is multiples of hepatitis C, and this would be a chronic condition.

So the market opportunity for a drug that can reverse fibrosis, prevent fibrosis, prevent liver transplantation, they think that that’s going to be pretty much the leading cause of liver transplantation by 2020. So it’s huge. And the way to play that is through three or four smaller companies. So that’s how we’ve invested in the fund. I know now Celgene’s looking at it, Gilead are looking at it, so it wouldn’t surprise me if that’s also an area of M&A.

ROBERT BAILEY: And looking at innovation generally, and ensuring that innovation actually comes to fruition, you mentioned on this slide the breakthrough designation by the FDA. What does that mean?

LINDEN THOMSON: I think that that’s just a good example of how, you know, I spoke about earlier about the good, the strong and supportive operating environment that these companies are now working in. This is another example of that, where the FDA has clearly seen that if you’ve got a serious condition where you’ve got a drug that looks as if it really impacts that condition, then they are prepared to give you a lot more support in the development. You can talk through things much more easily, much more quickly, they’re going to give you expedited review times. It’s just another example of how they are seeing that this is the area that drug companies need to focus on. And if you do that you will be rewarded.

It doesn’t mean that they’re going to approve the product, but interestingly that company Spark Therapeutics I just spoke about has got breakthrough designation for their eye gene therapy. And Intercept which is one of the NASH drugs, the companies that are developing drugs for NASH has got it for their OCA as well. So both of those I spoke about as innovation have actually been given this breakthrough designation by the FDA.

DANI SAURYMPER: And what this also means is the pace of innovation, and what I mean by that is the time it takes to develop a drug in the clinic and bring it to market is shrinking massively. So we just had a drug approved by AstraZeneca, a drug called Tagrisso which is a drug for lung cancer. And essentially from first in clinic to market it’s been just over three years. So it’s probably the fastest I can recall in terms of drug entering development and then reaching the market. And that’s all aided and abetted as Linden says by this very sympathetic regulatory environment, where if you go back five or 10 years ago it was much more a risk averse regulator. And now it’s recognising there’s a balance between risk and benefit. And maybe you could argue there’s a pendulum that has swung maybe too far the other way, but thankfully what we are seeing is great efficacy and balanced risk. And so the FDA is willing to work with companies to get drugs onto the market.

LINDEN THOMSON: If I could just add another point though, I think that it’s also important to understand that I think drug companies get it a lot more than they used to. And so it’s not just the FDA being more sympathetic as such, but it’s also companies understanding that for them to succeed they need innovation. They need to be able to hit all of those boxes that I spoke about earlier. And companies really are, and so we’re really now seeing some fantastic new oncology products, immune-oncology. These drugs are getting approved much more quickly as Dani said, because as well as our understanding of diseases improving, they are also really understanding the kind of what is required in the market today. This is not just another me too that you can put double the amount of sales reps behind and hope that you do well. We’ve moved on from that market. And so I think that large cap pharma as well as biotech has really moved to that business model.

ROBERT BAILEY: And you mentioned this briefly when you were talking earlier, but M&A and the impact of that. Clearly if there are large drug companies and large biotech companies out there who are looking for innovation, one of the ways they can obtain that is by M&A. What have we seen in the market and what do you expect to see coming forward Dani?

DANI SAURYMPER: It’s something we’ve written about in our monthly updates, and just before the Pfizer/Allergan transaction got announced. If you were to take the 12 largest drug companies in the world, they have relatively under-levered balance sheets. And if you were to go to three times net EBITDA essentially there’s about $400 billion of theoretical fire power at their disposal. So there’s tremendous opportunity for M&A I still believe, even after a record year in 2015. And it genuinely is a record year for M&A in healthcare over the last 10 years. And it won’t be restricted just to the pharma and biotech world. Medical devices, life science tools and diagnostics, all these companies are relatively under-levered and have an appetite to go off and make some acquisitions.

And I think companies are more conscientious with shareholders’ capital in terms of they are looking to drive long term growth. It’s not just about a financial driven, or a financially motivated transaction. As much obviously as there’s noise and rhetoric around tax inversions with the Pfizer/Allergan structure, it is also helping long term augment the Pfizer business model and allows them maybe to become, well ultimately split up into a couple of specific business units, which is the long term goal and standalone business units.

ROBERT BAILEY: So you’ve seen a record year in 2015, and you see that momentum carrying into 2016.

DANI SAURYMPER: Very much so.

ROBERT BAILEY: Even against maybe a macro backdrop which isn’t as helpful.

DANI SAURYMPER: I think the macro backdrop actually makes it a little bit more conducive to M&A, because we’re clearly about to enter a rising rate environment. So the window in which (a) you can get access to cheap credit, and the window within which you can effect an inversion if that’s your motivation to bring down your tax rate, that window is shrinking and narrowing. And I think you’re at a point now where management teams, as much as obviously some valuations are still quite high, but they’re going to miss a big window of opportunity the likes of which we probably won’t see for another cycle potentially.

LINDEN THOMSON: Can I just add on the M&A from a biotech point of view, and a large cap pharma point of view? On the last earnings calls of the large caps almost every company spoke about M&A. And I felt they were far more aggressive, and particularly in large cap biotech, far more aggressive about pursuing M&A and pursuing innovation. And much to that question that you asked originally, investors are supportive of companies going out and doing M&A for innovation. Clearly price is important but we’ve seen Celgene in the last year be very very aggressive on business development and M&A. And that’s been an outperformer relative, so in that kind of environment I would expect M&A to continue. We’ve actually had two deals in the sector in the last month or so.

DANI SAURYMPER: And just one announced this morning as well, where we’re also seeing more innovative M&A, not just in terms of acquiring innovation but the structure of those deals. So if you go back over a year we had Novartis and GlaxoSmithKline getting together exchanging assets around vaccines, consumer healthcare and oncology. Just this morning we had Sanofi announcing an asset swap essentially with a private company called Boehringer Ingelheim where Sanofi will divest its animal health business and in exchange receive a consumer healthcare business from Boehringer Ingelheim.

ROBERT BAILEY: I want to move on to some, perhaps the challenges. We’ve spoken a lot of the opportunities and the innovation that’s out there, and talk about a couple of things that I guess are a threat to the industry. I mean we’ve got a graph here showing the price of genome sequencing since it was devised, logarithmic scale here but you’ve seen a massive reduction in the cost of that. Is that an opportunity or is that a threat?

DANI SAURYMPER: I certainly see it as an opportunity. Linden talked briefly about gene therapy but essentially this has helped facilitate curative therapies in terms of looking at gene therapy. You’re getting much more targeted approaches to drug development. So our understanding of disease, our understanding of how to try and go about combatting some of these diseases is enhanced immeasurably by gene sequencing, and I still think we’re on the tip of an iceberg, I call it the cusp of another innovation wave, and it’s driven by the cost of this technology coming down quite substantially.

LINDEN THOMSON: If we talk about targeted therapies, it wasn’t that long ago where chemotherapy was the mainstay of cancer therapy, which is just essentially ablating your immune system, non-targeted completely. Then you compare and you look at our understanding of genes, our understanding of the genetic mutations which cause cancer. When you think about it from an investment point of view, you’ve got a company who’s just, there’s no target in phase one, versus a company where you say well we know that this mutation causes the cancer, we know that this drug essentially targets that mutation, it makes you feel a lot more comfortable with the mechanism of action and the potential at a very much earlier stage of development. And from a probability of success it’s actually, targeted therapies have a higher probability of success because you understand the exact mechanism you’re working with at an early stage.

Now clearly these drugs may still not be safe, and they need to be tested in the correct population in size. But from a mechanistic point of view I think with targeted therapies you can really, from an investment point of view get a much earlier read and comfort on a drug trial.

DANI SAURYMPER: And what it also allows you to do is not just from a clinical perspective but also from a commercial success perspective, because you have a very defined target population that you’re addressing this new drug towards. And so often either there wasn’t a therapy, as Linden said it may just be a broad chemotherapeutic, but now if you actually have a targeted therapy for a specific type of mutation in a lung, in any cancer let’s call it, cancer is on the cusp potentially of becoming much more of a chronic disease rather than the death sentence that we’ve historically associated it with.

ROBERT BAILEY: Let’s move on because we’re starting to nudge with time. And I just want to talk about, I mean you can’t really talk about healthcare without mentioning the US election next year, and we’ve had a couple of questions around that as well. But also talking about the influence of Hilary Clinton on I guess sentiment in the market initially, but obviously potentially much more significant than that. Got a slide here showing the impact of a Tweet that Hilary Clinton sent out, and that kind of risk I guess is always there in this market isn’t it?

DANI SAURYMPER: Yes, I mean generally speaking as you go into a US Presidential election cycle the uncertainty is not great for healthcare. The uncertainty particularly as it relates to the risk of a Democrat President. Now the reality is we’ve lived with a Democrat President for the last eight years, so it’s not a massive change in the status quo. But what has clearly changed is it’s very populist in its nature, but there’s clearly rhetoric from candidates talking about trying to rein in drug pricing, which has grown pretty substantially. Now I could argue back the other way that drug pricing has grown on a gross level but the net level is very different, because companies are giving quite significant discounts and rebates.

I would also argue that you risk tainting the entire industry by the actions of a few bad companies basically. I don’t want to say bad companies but bad actors let’s call them, where you’ve seen individual drugs taking egregious price increases. And I wouldn’t say that is reflective of the entire industry, but clearly post the initial tweet from Hilary we saw quite a significant derating. And then subsequently a good example of a stock on the right was Valium, which not only was associated with taking aggressive price increases, there was also then questions around its selling practices as well, which just brought a whole new unwanted light shining on that business model.

So it’s clearly a challenge. The reality is if you look at what President Obama in his election campaign promised, his two most worrying, if I can call them that, proposals was direct price negotiation with manufacturers by the government, and drug re-importation. And in spite of having a clear mandate in both the House and the Congress, and despite having been able to affect Obama care or the affordable care act, those two key provisions never made it to the final act. So, as much as it is an overhang, feel fairly comfortable about what in reality can be done around drug pricing in the US.

ROBERT BAILEY: And Linden, when we look at the threats to the sector as a whole, but biotech in particular, you look at the politically sensitive areas are a key thing on the horizon. But what are the other challenges, what are the other things that cause you to have a slightly less positive view on the sector?

LINDEN THOMSON: Well I would say that for biotech specifically drug pricing is probably the biggest concern. And I’ve come out and said that I wouldn’t be surprised if we see more volatility around that, just because it’s on the front page of The Wall Street Journal almost on a daily basis, on The New York Times in the US. So I agree with Dani’s statement that it’s fundamentally probably not an issue; however sentiment-wise and rhetoric-wise I think it will probably be an issue for the next six months. And that’s what’s taken the biotech sector specifically down, the last two corrections have been primarily based on that. Now obviously in here we’ve got R&D productivity and R&D failures.

Now going back to what I was saying about the fact that there’s been this virtuous cycle of successful R&D, successful product launches, and now growth is starting to slow from a low base. I think increasingly it will be important for companies to get good product data. And so we’re expecting at least two big product news flow catalysts from Biogen next year, another one, a couple from Gilead. I think that those kind of things will have to come through positively, and if they don’t I think that there will be a dent to sentiment in the sector. So that’s R&D risk that we speak about here, and the fact that a lot of the smaller cap companies for them to do well they are much more binary in nature from an R&D point of view.

I would also say that Dani can speak more about the interest rate cycle and healthcare and biotech in particular, the view, the long held view is that that’s not positive for biotech given that a lot of its valuation is based on a DCF (Discounted Cash Flow). However actually if you look at the reality that’s not the case. So there’s that, and there’s also macro concerns and potential for growth outside of biotech and healthcare, and investors moving their assets out of healthcare. But from a fundamental point of view from the biotech sector, I think pricing, you know, R&D risk is always a risk. They’re probably the two key things. See how biosimilars play out, but as I said I don’t expect that to be as big a concern as I think people had already thought.

ROBERT BAILEY: And Dani, do you have anything to add to that?

DANI SAURYMPER: I mean Linden mentioned obviously the impact of rising rates. There’s no getting away from that. Historically in a rising rate environment pharma underperforms on a six to nine month view. On an 18 month view it still comes out as a broad positive, but short term it’s not a good thing. The irony as Linden said, you would have thought that would be a negative rising, short term rates would be a negative for biotech, and actually sell side research actually shows that post initial rate rises biotech is the one sector that actually outperforms. So it’s all great for Linden’s sector. But I think there’s a couple of things to understand or bear in mind. I would look at the broader healthcare universe maybe growing high single digit on earnings growth, which is still close enough to above market and certainly in 2016 and going forwards.

And I think that’s where you’ve got to try and play into some of the other subsectors where they’re less impacted by say macro issues. Great subsector that I’m focused on at the moment is called life science tools and diagnostics, where there’s a real tailwind from an increasing budget. The National Institute of Health in the US, you’re looking at possibly the biggest increase in its budget for spending essentially in the life science industry. So life science tools, companies help facilitate discovery of new targets, new understanding in terms of disease mechanism. And so that’s a subsector that I would look at as saying potentially relatively averse to some of these macro pressures in the near term.

ROBERT BAILEY: We’re running out of time, so I just want to cover one quick question on each of the portfolios here. And Dani, starting with you on the health fund, we’ve had a question about Glaxo in particular, which you can see here is the second largest overweight in your portfolio. And the question was that actually Glaxo’s held in a lot of UK equity income funds, the question I guess is is there the innovation within Glaxo or is it just a dividend play, what’s your perspective on that?

DANI SAURYMPER: Well I mean my starting point is certainly it has a very attractive dividend yield of about 6%. And I see that dividend as very much safe as they’ve guided to over the next two or three years. The real issue for Glaxo has, as you rightly say about innovation and the pharma business, I would point out going forwards post the Novartis acquisition of their consumer health joint venture and also in terms of their vaccines portfolio. You’ve got essentially over half the business now comes from consumer vaccines and a very attractive HIV franchise, which is 70% plus operating margin. Those have got very strong I would say sustainable growth outlooks, 5-6% top line growth, maybe faster in the HIV business, and operating margin improvement.

In the pharma business there’s obviously a big controversy around its respiratory franchise going through some pressure, but they just had an R&D day back in I think it was October, and essentially if it wasn’t the Glaxo of old you would argue this has probably got one of the best early mid stage pipelines in the industry. But because historically we’ve had experience of Glaxo perennial disappointments, not necessarily in terms of drug approvals but certainly in terms of commercial success of those drug approvals, there’s a high degree of scepticism. I would argue that’s more than reflected in the current valuation. You have got an attractive starting point in your 6% dividend yield. I think you’re going to continue to see them strongly execute in terms of their base business in the coming quarters. For me that’s an interesting growth at a reasonable price opportunity.

ROBERT BAILEY: Brilliant, thank you. And Linden, just quickly on the…

LINDEN THOMSON: One minute.

ROBERT BAILEY: In one minute, on the biotech funds you’ve got a number of stocks you hold in here which aren’t represented in the benchmark. Is that where you’re finding the best ideas, the best innovation, on the very small companies or is it more broadly spread?

LINDEN THOMSON: It’s broadly speaking to be honest I think that I try across, the sector allows me to have large cap companies that are both value plays or innovation growth plays. It allows me to look at stuff outside of the US. And remember my benchmark is purely US, so European names are off benchmark. And that’s been, there’s been a valuation disconnect there between Europe and the US, which I’ve played, some of them I’ve closed out now because they performed very well in September/October time. And some of these small SAMPRO, Prothena, these are pure one product innovation. Prothena has a potential treatment for the underlying cause of Parkinson’s disease, so basically across the whole spectrum I’ve been looking at XUS, large cap, mid cap and small cap.

ROBERT BAILEY: Brilliant, all right. Thank you very much Linden. Thank you Dani. And thank you for joining us today. We’ve had a number of questions and we’ll endeavour to answer those that we haven’t managed to answer during the webcast. We’ll email those to you this afternoon. But for now Linden Thompson and Dani Saurymper, thank you very much for joining us, and thank you for watching.

* Aging in Asia: Findings from New and Emerging Data Initiatives, July 2012
** The Economic Costs of Type 2 Diabetes: A Global Systematic Review, March 2015
*** The World Bank, Health Expenditure, Total (% of GDP), 2013
**** Lipper as at 30/11/2015. Basis: R share class, NAV, net income reinvested, net of fees in GBP. Indexed to 100. Past performance is not a guide to future performance.


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