Innovation in healthcare: at a sector sweet spot?

​​The healthcare sector is experiencing a rapid pace of innovation, a trend that Andy Acker, Portfolio Manager in the Global Life Sciences Team, says is likely to continue in 2019 to the potential benefit of investors.

What do you think are the key themes likely to shape markets in 2019?

We believe innovation will be a driving force for healthcare stocks in 2019. Over the past two years, the US Food and Drug Administration (FDA) approved more than 90 novel therapies. These products, still early in their launch phase, could drive industry growth for years to come.

Many new therapies represent revolutionary advances in medicine. Immuno-oncology medicines, for one, harness the immune system to target and attack cancer cells, often with impressive results. Exciting advances are being made in gene therapies that address rare and debilitating diseases. The first gene therapy was approved in the US in late 2017, and we expect additional approvals as soon as next year. Advances are also being made in medical devices, where the first integrated continuous glucose monitor for diabetes management recently won FDA approval and positive clinical trial data were presented for mitral valve repair and drug-eluting stents. Finally, a consolidation in services is leading to more integrated healthcare services companies.

Where do you see the most important opportunities and risks within your asset class?

Drug pricing reform in the US remains a concern for the healthcare sector, as President Trump has made lowering consumers’ out-of-pocket drug costs a priority. An e-commerce and cloud computing giant’s acquisition in June of an online pharmacy could also lead to disintermediation of the drug-supply chain. Broadly, we believe reforms that remove inefficiencies and improve patient affordability are good for the system in the long term. As always, we also have to think about the binary nature of drug development. For as many drugs that get regulatory approval, a multitude of others never make it out of clinical trials, leading to volatility.

How have your experiences in 2018 shifted your approach or outlook in 2019?

In our opinion, remaining disciplined on valuation in 2018 was critical to managing downside volatility. During the summer, we saw a high level of investor enthusiasm for early-stage biotechnology companies, even though fundamentals did not always support elevated valuations, in our opinion. When the broad equity market declined in October, many of these stocks had the farthest to fall. Consequently, we remain committed to taking a balanced approach, investing across the healthcare sector’s major subindustries, market capitalisations and geographies.

But overall, our enthusiasm for the sector has never been higher. In addition to companies delivering medical breakthroughs, regulators globally have shown their commitment to quickly bringing treatments to market for patients with high, unmet medical needs. With new drugs and medical devices in the process of launching — and major patent cliffs largely behind us — we believe this is a sweet spot for many areas of the sector.