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  4. Episode 27: Investing in Healthcare: Smarter Strategies & Greater Impact in 2020

Guest speakers:

Sanjiv Talwar, Senior Healthcare Analyst and Portfolio Manager at Invesco

John Divine, Senior Investing Reporter at U.S. News and World Report.

Investing in Healthcare: Smarter Strategies & Greater Impact in 2020

Episode 27 | Duration: 20 minutes

Get a 360° overview of the key sustainable healthcare investment opportunities in Q2/Q3 2020. Find out which areas are the most promising, how to manage risk, and what to expect as we move forward with tackling the global health crisis. Tune into our interview with Sanjiv Talwar, Senior healthcare analyst and portfolio manager at Invesco and John Divine, Senior investing reporter at U.S. News and World Report.

  • Keesa Schreane [00:00:01] Health care is one of those sectors that tends to be pretty reliable, even in challenging markets. Broadly speaking, health care is ripe for ESG investing because it offers attractive historical returns and, in many cases, produces solutions for social good. These days, the health care industry is going through a major transformation. Many expect to see a boom or at least a gradual increase in investing in this industry. So what are the key drivers and opportunities investors should consider? Here to help us find some answers, Sanjiv Talwar, Senior Healthcare Analyst and Portfolio Manager at Invesco and John Divine, Senior Investing Reporter at U.S. News and World Report. Thank you both for joining us.  

    Keesa Schreane [00:00:52] Let's start by talking about healthcare's performance during the market's bumpy road during the first quarter and now at the end of the second quarter. Can you shed some light on the sector's performance? What's going on there?  

    Sanjiv Talwar [00:01:03] Well, you know, to state the obvious, the stock market has been incredibly volatile. And I think since the market bottomed probably around March 2010, healthcare has all but recovered. And it's somewhat in line with the broader market. But I will say there's a very large difference in the performance and different focus of health care of the year. And this variability has been, I think, directly driven by the COVID crisis. Different pockets of health care have been affected very differently. For example, the two critical focuses that have outperformed are those associated with telehealth and then biotech. And then probably the worst performing has been sort of med device companies that specialize in elective procedures, for example, joint replacements.  

    Keesa Schreane [00:01:56] So if you're talking about these new technologies that are emerging, telehealth is one of those, with this, what sort of returns could investors expect to see in the second half of 2020, especially in light of those new technologies emerging?  

    Sanjiv Talwar [00:02:13] Yeah, I think one of near term and then sort of future returns will depend in large part on the trajectory at the length and depth of the COVID crisis.  I'd expect at least a pandemic to continue, perhaps even becoming endemic, at least until there's a vaccine early next year.  

    John Divine [00:02:41] Yeah. I would just say that in telehealth, there's really only one major player that's publicly traded that I know of - And Sanjeev may know of more -  but Teladoc is sort of the big player here. And, you know, the president, has mentioned, telehealth in a White House address, sort of emphasizing that is an area that needed more focus. That was going to be helpful during this crisis. Medicare has begun to cover that. And I think that, you know, competitors will come into this area. But Teladoc has a good start there. And I know, you know, friends and family that have already used that service to visit with doctors remotely and they even do counseling services and stuff like that. So I think that's a really helpful area that is going to be here for the long term. And that that's really the company to watch, in my opinion.  

    Keesa Schreane [00:03:48] And so, John, just in terms of variables that might be able to dampen that, you know, you mentioned clearly that this is the wave of not even the future, it's happening now. What are you hearing in terms of issues that could be problematic? Are either situations that could change the trajectory of what seems to be an upward trend for telehealth?  

    John Divine [00:04:12] Yeah, you know, I think that there are some things that -  and again -  I'm not a doctor, so, you know, let's clarify that. But, there are some issues that really may not be well suited for telehealth. And, you know, obviously, if there are chronic illnesses or issues that you actually have to get checked out in person to see what the options are for you, there are limitations there. But I think the psychology of, you know, the average person is going to skew more towards being conservative in the future. And, you know, maybe if it's not one of those areas that they'd be more inclined to do telehealth. So it does have limitations. But I don't see this slowing down as as a long term trend.  

    Keesa Schreane [00:05:09] OK. Great in terms of looking at the broader picture of sustainability for investors who are interested in impact investing, in sustainable investing. Do you see, Sanjiv, that there are certain trends that those ESG investors need to think about as it relates to the health care industry? And if so, what are they?  

    Sanjiv Talwar [00:05:30] Yeah. Let me just actually then echo a little bit sort of what John said. Certainly, I think maybe I'll highlight just two or three of them. The first one is the sort of mentioned telehealth. And I think we are seeing a structural shift in behavior by patients and physicians to adopt telehealth in all its forms. And this will likely stick to that. That is my view, lead to some profound long term shifts in health care delivery.  

    [00:06:00] The second area that I'm sort of intrigued by is biotech. You know, this is a pocket that has been depressed for a good five years. And I think it started when Hillary tweeted about Trump rising in 2016. But sort of the outlook has changed for them to me. And most obviously, it's all about innovation. And this is most evident how biotech is holding on, at least playing a role in solving the COVID crisis and starting with the antivirals and coming up maybe the next month or two, with antibodies and vaccines. And certainly, the political rhetoric around drug pricing has died out and so much increase in sentiment around pricing. And, of course, historically low valuations. And another theme in the longer term might be biotech being a beneficiary of, you know, US - China tech rivalry.  

    [00:07:00] And maybe there's a third one I'd like to add. Oftentimes overlooked, biological manufacture. Right. This notion of vaccines and biologics, there's going to be a massive bump in the demand for these things simply because we don't have enough vaccine or, in fact, antibody manufacture to go around, probably, for the next year or two. So those are the three areas, even in terms of ESG, that have changed that I'd like to highlight.  

    Keesa Schreane [00:07:37] If we look at M&A possibilities, so we look at the larger biotech firms versus the smaller ones. Do you see anything percolating there in terms of how that might impact expectations around biotech performance in general?  

    Sanjiv Talwar [00:07:53] Yeah. Well, that's the point. I think we have seen, we have started to see, towards the latter half of last year, a clear pick up in activity, at least in my view, at these depressed valuations. The amount of innovation that some of the small and mid-cap companies own and the amount of cash sitting in large biopharma companies, I don't think it's ever been as high. And so I think there is a willingness now to put that money to work. Personally, I would see the increasing need for a lot of consolidation. I think there's a lot of duplicate R&D medicines in the space in the pipeline. So that needs to come in a little bit and in the near future.  

    Keesa Schreane [00:08:51] So if we want to look at the top five, the top three stocks in this area. And just giving some additional context around them and why it might be good for investors to start thinking about those top three or top five. How would you approach that? And I'd love for that to go to both of you. How would you look at the top three of the top five stocks in this area in terms of the good ones to think about at this point?  

    John Divine [00:09:16] Yes. Well, sort of to piggyback on something that, Sanjay, you've just mentioned with the M&A aspect and biotech. One thing just to say before getting into specific names is that investors should realize that oftentimes biotech can be with the smaller names, especially sort of a binary outcome. You know, it can be either they get acquired for a huge multiple of their current price or four for a huge premium or, you know, they don't have any revenue at the moment. And there everything is riding on something that's about to come out. And if it doesn't, if the clinical data isn't good, then it doesn't turn out well. But with that said,  I would just say that you need to know your risk profile first. I think that on the lower risk side of things, you have companies like Becton Dickinson - it's a dividend aristocrat, it's a multi-billion dollar company. It's going to be fine, sort of no matter what happens. But, whenever we get a vaccine, then you have sort of higher, higher risk names that may have a lot to gain, like Moderna which is working on a vaccine. I mean, there's a lot of companies working on vaccines now. I think there's over 100 globally. But I think, getting back to the ESG focus, some lower-risk names that will be needed, regardless of who comes up with what or who is the homerun winner is, is, you know, retail pharmacies like CVS and Walgreens. I think they're going to be crucial for distributing and administering the vaccine. When that day comes. So there are just a few names, and I'm sure Sanjiv has some other interesting ideas.  

    Sanjiv Talwar [00:11:38] Right. Absolutely. Let me try and tackle that M&A question right. And it's one that I get very often. It does come with a warning and these companies, mid-cap biotech, are extremely volatile. But I would think any campaign with a really good platform or late-stage clinical asset is likely in play. And, you know, if I were to offhand, pick two or three in that sort of size area that, you know, just scientifically very interesting.  

    [00:12:16] You know, a company like these may be relatively not know. For example, Uniqure NV, the gene therapy company, just an extraordinary platform in my view, and then a couple of smaller companies that are working on really good science. One of them is Principia. 

    Keesa Schreane [00:12:54] The one thing I do want to talk about when you're mentioning these are any stocks, particularly in this area, there could possibly be a reputational risk. So what types of negative news might we hear about in the media, whether it's now or whether we're talking about possible scenarios of what could possibly turn the trajectory of these stocks around? Based on, you know, findings, negative news, and reputational risk, that could really play a role in investors' consideration.  

    John Divine [00:13:25] I think that's a great question. I think there's one issue off the top that I would just mention and they'll pass the ball back. But I think it's the issue with testing in the early phases- there has been a number of companies that have come out with claims that they couldn't really back up about the accuracy of their tests or, you know, what it meant for the future. You know, if you got a positive test, is that any actionable information and how reliable is that? So regulators have cracked down on that a bit. But in the early goings, I think there was arguably some fraud in that area. And so it's just really important when it comes to testing those companies is to make sure they're not shady. I would say that.  

    Sanjiv Talwar [00:14:24]  I can add to that a couple of things, especially coming back to this that a biotech theme. And, you know, obviously. There's got to be some caution around how these things are priced, especially in the case of sort of global pandemic. And I think that's going to be one area on focusing. Everybody is going to be looking at it.  

    Keesa Schreane [00:15:14] Great. So if we were to look at and take that more holistically and have a rapid-fire top thing that may catch us by surprise, if we look back at 2021 and say, wow, how do we miss that? What was that thing be, that particularly institutional investors may not be factoring in at this point? What would you say? And maybe one of the factors that you just mentioned would fall into that category. But what would you say would be the top surprise area that institutional investors should at least think about now. 

    Sanjiv Talwar [00:15:51] Yeah, that's a tough one. We spoke about quite a few things. It may be time. So I go back to, you know, just because of COVID and crisis. And that's probably still not enough certainty of whether some of the vaccines work.  I hope we can be sort of quite optimistic just given the biology of the virus that some of these would come through. You know, there's still considerable doubt even in the face of some elevated sort of valuation. And the other, you know, might be when you have this poor out of treatments, how you get it to eight billion people around the world. And that is certainly the manufacturing - you know who supplies it? I don't think people are paying enough attention to it. That's sort of a very, very critical area because we just don't have enough bandwidth and resources to go around. And so that's another thing I think could come out of that.  

    John Divine [00:17:00] Yeah, and I guess on my end. And this doesn't directly relate to coronavirus. But I think that in a little bit longer-term gene editing is going to be a much, much bigger area of focus, not only in health care itself but for investors. And there are some public companies out there like CRISPR Therapeutics and Editas. 

    Keesa Schreane [00:17:38] Could you give us some background on gene editing? And are there some folks who would like to be a new concept? Explain what that is.  

    John Divine [00:17:44] Yeah. So, I mean, I haven't gotten my doctorate myself, again I must clarify that but it's,  basically a way to go in and edit DNA to eliminate certain vulnerabilities, or you can actually potentially be used to sort of remove the DNA that would cause disease. And so it's being used right now. Some of the early tests that are going on are there's a sickle cell candidate out there. That's early testing. One of the companies is looking at childhood blindness. And obviously, on a larger scale, you know, the big diseases and issues like cancer could eventually be addressed. But, you know, it's in the very early stages and there are some moral concerns because just to be frank about it, the big concern is, is like, you know, custom gene-editing babies. You know, if you want to have a certain baby with certain characteristics, there are obviously huge concerns there. So, like I said, very early stages, but it's a very high potential area.  

    Keesa Schreane [00:19:08] These are some fascinating insights that I know will definitely resonate with our institutional investor audience. But I have a feeling we'll be new to them as well. So we appreciate your insight and your thoughts here, Sanjiv. John, thank you so much for joining.