December 2018

Disruption in Health Care Holds Promise for Investors

Disruptive innovation in health care is leading to new standards of care with more positive outcomes for patients and new opportunities for investors. Recently, Global Life Sciences Fund co-portfolio managers Andy Acker, CFA, and Ethan Lovell spoke with Janus Henderson Report about investing strategically in an environment characterized by rapid and accelerating change.

Using our deep fundamental research focused on the perspectives of physicians, patients and payors, we seek to make more accurate forecasts and generate potentially better outcomes for investors.

What role is disruption playing in the health care sector?

One of the most exciting areas of disruption involves advancements in genomic science. Since the conclusion of the Human Genome Project almost 20 years ago, scientists have made rapid advances in genomics. Consequently, they now have a much better understanding of the underlying genetic causes of disease and are better able to develop new therapies that directly target those underlying genetic defects. This is resulting in tremendous advances in treating the over 7,000 genetic diseases, only 5% of which currently have a treatment. These diseases are being treated using gene therapies and gene editing and are leading to the exciting modality of personalized medicine. Right now, we are just at the beginning of this trend.

We are also excited about recent advances in immuno-oncology. These therapies activate the immune system to attack and kill cancer cells, leading to long-term remissions in previously incurable cancers. Used alone or in combination, these therapies are already transforming the fight against cancer and hold great promise for the future.

Is the current pace of change and degree of disruption unusual?

While there always have been evolutionary improvements in how we treat human disease, recently the pace of innovation is accelerating. The changes in how we treat patients now – and how we will treat them in the future – are really becoming revolutionary.

What examples of disruption have you evaluated for your fund?

One example is an emerging biotechnology company focused on new treatments for high-severity diseases using one-time drug delivery in place of a daily pill or monthly injection. The company has developed a new gene therapy for spinal muscular atrophy, the leading genetic cause of infant mortality. Until recently, few patients with the most severe form of the disease would live to be two years of age. And in fact, many of them would never be able to sit upright. The company’s treatment offers the potential for a functional cure, so these children can go on to lead reasonably normal lives.

When we first invested in the business, this one-time treatment was in the early stages of development at a private company. Three years later, that company was acquired by a major pharmaceutical company for $8.7 billion. Now, this potential breakthrough medicine has been filed with the FDA, and we expect launch in 2019.

In what other ways is health care facing disruption?

In addition to looking for companies addressing unmet medical needs, we also seek companies that are making health care more efficient. For example, there are businesses using state-of-the-art technology that enables individuals to consult with a physician via video or by telephone. Telemedicine provides a high-quality experience for the patient yet is more convenient and less expensive than traditional service delivery. You can see how virtual care could have tremendous potential around the world and here in the U.S., where the cost of health care is now approaching 20% of our GDP.

What is the role of fundamental research in evaluating opportunities in this sector?

The way we analyze and make forecasts for future therapies is critically important, and it follows what we call “the 90-90 rule.”

When it comes to new therapy development, approximately 90% of drugs that enter clinical trials never make it to market. Our analysts rely on their scientific backgrounds (including two Ph.D.s) and statistical analyses in an attempt to more accurately predict which therapies will be successful. This is a complex evaluation and requires scientific acumen and statistical models few investors possess. This evaluation of the clinical risks associated with developmental stage companies represents the first half of “the 90-90 rule.”

The other half pertains to the early-launch phase of new medicines. We find approximately 90% of the time, Wall Street analyst forecasts are highly inaccurate. For example, a year before Gilead launched their novel hepatitis C therapy, the first-year sales estimates were for about $1 billion. However, these forecasts were pretty far off, and the therapy actually generated $12 billion in sales its first year, driving much higher profitability and share price performance.

Using our deep fundamental research focused on the perspectives of physicians, patients and payors, we seek to make more accurate forecasts and generate potentially better outcomes for investors.

In health care, there is a huge difference between the winners and losers, so it is really important to be right.

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Learn more about Janus Henderson Global Life Sciences Fund.