In this interview, Andy Acker, Portfolio Manager of the Janus Henderson Global Life Sciences Fund, explains the impact of COVID-19 on health care and how he and his team of research analysts seek to capture health care’s significant growth opportunities while minimizing downside risk over the long term.

Some of the Fund’s analysts have advanced scientific degrees. How does that contribute to your investment approach?

We think understanding both the science and commercial opportunities in health care is critical to investing in the sector. Industry research shows that roughly 90% of drug compounds that enter human clinical trials never make it to market. Among therapies that do launch, our experience finds that investors either over- or underestimate a product’s commercial opportunity 90% of the time. We call this phenomenon the 90/90 rule and believe our approach, based on a deep background in both investing and science, can help minimize downside risk while potentially capturing upside. Combined, our team has decades of investing experience in health care, and we have developed proprietary statistical models to help project market opportunities for new therapies. In addition, three of our analysts – Dan Lyons (with 20 years experience with the Fund) and Luyi Guo and Agustin Mohedas (who joined the team more recently) have biomedical-related Ph.D.’s.

The Fund is overweight biotechnology. What do you like about the sub-sector?

The pace of biotech innovation has accelerated over the past decade, with record levels of new product launches and a clear increase in research and development. All of this is possible thanks to new pathways for regulatory approval, improved genomic sequencing and novel drug modalities that allow researchers to target disease in new ways (e.g., gene and cell therapies). Many of today’s drug discoveries will likely markedly improve patients’ lives or provide treatments where none existed before, raising the odds of a drug’s uptake by patients and reimbursement by payers. We believe biotech’s innovation will only accelerate from here, creating opportunities for investors who can identify the most promising drug developments. When we look at the Global Life Science Fund’s cumulative 10-year return, we see that our positioning in biotechnology has been a key driver of outperformance, exceeding our primary benchmark, the MSCI World Health Care IndexSM, by nearly 90 basis points (100bps=1%).¹

Has the COVID-19 pandemic changed your outlook for biotech at all?

COVID-19’s impact on biotechnology has been twofold. On the one hand, the pandemic has helped to spotlight the industry’s innovative prowess. Companies developing vaccines, for example, were able to start clinical trials in record time thanks to advanced tools, such as mRNA technology, which essentially instructs the body how to “manufacture” a self-made vaccine. On the other hand, the social distancing necessitated by the outbreak interrupted some clinical trials and delayed drug launches. However, while these disruptions could weigh on near-term revenue, we think the delays are only a temporary headwind.

How has COVID-19 impacted other areas of health care?

We believe the pandemic could accelerate some health care trends that had been gaining momentum prior to the crisis, including telemedicine. In the U.S., the leading provider of telehealth reported that daily visits climbed 100% in mid-April compared to the previous month. While telehealth volumes are likely to ease somewhat as social-distancing rules relax, we believe a significant portion of providers and patients will continue to use telemedicine, given the technology’s convenience and cost efficiency. Other areas of change include health care supply chains, much of which currently pass through countries such as China and India. These chains could become more diversified so as not to repeat the supply bottlenecks and concerns we experienced during the outbreak.

What role can the Fund play in a portfolio?

The health care sector offers opportunities for access to innovation-driven growth. But it can also prove resilient during market downturns. For example, during the first quarter, as COVID-19 began to spread globally, the MSCI All Country World IndexSM declined by 21.4%. Meanwhile, the MSCI World Health Care Index fell by just 11.5%. Investors rewarded firms with more stable earnings as patients continued to refill medications, as well as firms developing new treatments and diagnostic tests for COVID-19. In our Fund, we look to balance health care’s growth opportunities and defensive characteristics by investing across the sector’s major industries: biotechnology, pharmaceuticals, health care services and medical devices. We use our scientific knowledge and investing experience in an effort to capture potential upside while mitigating downside risk and believe this active approach could offer valuable diversification to an equity allocation.

¹ Data as of 3/31/20.

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