Even while health care companies have been leading the charge against COVID-19, the sector trades below the broad market average. In this interview, Andy Acker, Portfolio Manager of the Janus Henderson Global Life Sciences Fund, explains how health care’s innovation and low valuations make for an attractive combination.

Where are we in the trajectory of the COVID-19 pandemic?

Unfortunately, COVID-19 is still with us and infecting large numbers of people due to Omicron. But this latest variant is proving to be less virulent than previous strains, especially for those vaccinated, giving hope that the disease may become more manageable. In addition, the Food and Drug Administration (FDA) recently authorized a new antiviral pill, Paxlovid, that can be taken at home. In clinical trials, Paxlovid reduced the risk of hospitalization in high-risk patients by 90%, a remarkable result. Supplies of the drug so far have been limited, but manufacturing is ramping up.

How has COVID-19 impacted health care stocks?

In 2020, firms addressing COVID with vaccines, treatments and diagnostic tests all performed well, as did biotech stocks broadly, as investors cheered on the industry’s scientific progress. But starting in 2021, pandemic-related disruptions, worries about drug-pricing reform and a leadership vacuum at the FDA brought an end to the biotech rally. Medtech stocks also suffered when COVID interrupted routine medical care and procedures. On the flipside, insurers’ costs went down as people deferred care, and the companies benefited from expanded government programs and health care access. Health care facilities also fared better than expected given government support and high reimbursement rates for COVID patients.

How are you approaching investing in health care now?

The sector trades at a significant discount to the S&P 500® Index just as capacity could be returning to the health care system (see chart). As such, we are looking for attractive opportunities across the four major sub-sectors: pharmaceuticals, biotech, health care services and medtech. With interest rates expected to rise this year, pharmaceutical stocks look especially attractive given defensive characteristics, strong free cash flow and low earnings multiples. Similarly, in services, we feel health insurers remain attractive in light of positive free cash flows and the potential for earnings to benefit from rising rates. In medtech, we continue to focus on devices that improve patient outcomes, save labor costs and create efficiencies. Biotech, meanwhile, is in the midst of a historic sell-off, with the industry’s small- and mid-cap companies having fallen more than 50% since their 2021 peak.¹ Yet these firms are driving some of the most exciting innovation in health care. As such, we are finding numerous opportunities to invest in innovation, while maintaining a bias toward revenue-generating firms or those with pipelines in the later stages of development.

Source: Bloomberg, from 30 September 1992 to 31 January 2022.

Note: Price-to-Earnings (P/E) Ratio measures share price compared to earnings per share for a stock or stocks in a portfolio. S&P Health Care comprises those companies included in the S&P 500 that are classified as members of the GICS® health care sector. S&P 500 Biotech comprises those companies included in the S&P 500 that are classified as members of the GICS biotechnology sector.

What medical advances are you most excited about?

We focus on companies developing therapies for high, unmet medical needs. Over the next 18 months, several data readouts could help validate research and build excitement for the sector. These include a gene therapy program in muscular dystrophy (a hereditary disease that leads to the loss of muscle mass), small molecule therapies for Huntington’s disease (a genetic condition that causes nerve cells to break down), and immuno-oncology programs in melanoma and lung cancer. The sector is also anticipating updates for a trio of medicines that aim to address Alzheimer’s disease. Positive data from these studies could lead to a multibillion-dollar market opportunity.
The high number of drug approvals are a testament to the strength of the sector’s innovation: Over the last five years, more than 250 new medicines have been approved by the FDA, up more than 100% from a similar period a decade ago.²

What role can a health care fund play in an investor’s portfolio?

The health care sector offers opportunities to invest in some of the most innovative companies in the world. But it can also prove resilient during market downturns. In fact, over the past four market corrections of 15% or greater, the MSCI World Health Care Index^SM has, on average, captured only about half the downside of the MSCI World Index ^SM.³
In our Fund, we look to balance health care’s growth opportunities and defensive characteristics by investing across the four major sub-sectors. We use our scientific expertise and investing experience in an effort to capture potential upside while mitigating downside risks. Given the dynamic and defensive nature of the health care sector, we believe our active approach could offer attractive return potential and diversification to an equity allocation.

Janus Henderson Global Life Sciences Fund (JNGLX)

¹ Source: Bloomberg. Data based on the SPDR® S&P® Biotech ETF (XBI), which is designed to correspond to the performance of a modified equal weighting of the
S&P Biotechnology Select Industry^TM Index, from 8 February 2021 to 27 January 2022.

² U.S. Food and Drug Administration, as of 31 December 2021.

³Janus Henderson Investors, FactSet. Data as of 31 December 1999 to 31 December 2021. Downside Capture is the ratio of a fund’s monthly return during periods of negative benchmark performance divided by the benchmark’s return.