nInterviewWithZiadBakri,
anager,T.RowePriceHealth
ciencesFund
ADoctor
nthe
House
yJoshNathan-Kazis
FORE HE TOOK OVER ONE OF THE BEST-PER-
rming health-care funds, Ziad Bakri was a
edical resident in the emergency room of the
oyal London Hospital.
The emergencies he dealt with there were
fferent from those faced by a Wall Street fund
anager, but Bakri says that his time at the hos-
tal makes him a better investor. “The experi-
ce of having treated patients, having communi-
ted with patients, thinking about things from
e patient angle and from the physician angle—
at can only be helpful,” he says.
Bakri left medicine in 2005, working briefly at
errill Lynch in London before joining Cowen &
. in New York as an analyst. He moved to T.
owe Price in 2011 and took over management of
e $13.2 billion Health Sciences fund (ticker:
RHSX) in April 2016. He now manages $16.3
lion across the firm’s health-sciences strategy.
e flagship fund has returned 14.4% on an annu-
zed basis since then, nearly 3% better than the
&P 500 Health Care Sector index, after fees.
Read on for edited excerpts from his discus-
n with Barron’s about picking biotech stocks,
e Medicare for All debate, and why unsexy
sinesses can be good businesses.
arron’s: What are you looking for when
u invest in health-care companies?
adBakri: We invest in products, and we invest
services. Products are drugs or medical de-
es; services are managed care companies and
alth-care IT and hospitals. On the product
de, it’s innovative new treatments that will ma-
rially change the standard of care of medicine
d represent an important advance in treat-
ent options for patients. On the services side,
hat we really try to do is find services that im-
ove access and affordability in health care. If
u are reducing price, then you’re benefiting
have talked about Medicare for All. What the
stocks reacted to in the first half of this year w
this small but nonzero probability that the
would be no role for health-insurance compani
under some of these scenarios. On the other sid
the much larger probability is that these comp
nies are not disintermediated; that they contin
to grow earnings double digits and be high fre
cash-flow generative. Under most scenarios, the
stocks should actually do reasonably well.
So when you have a situation like that, whe
there’s a low probability of a very extreme ou
come, I think the right way to manage that is
say, “Well, what do I believe will happen?”
I believe that we will not have Medicare f
All. I think these companies will continue
grow earnings double digits, and therefore I a
going to go with the probability. Now, obvious
you have to have position sizes that are comme
surate with the level of risk. And there is som
level of risk here. And so we’re overweight, b
we’re not wildly overweight.
What’s one stock that you’re particularly
excited about?
Novocure [NVCR], which makes a medical d
vice for cancer. It started off in glioblastom
which is a type of brain cancer. You have to sha
your head and put this product on it, and it em
electromagnetic fields. The whole world w
skeptical of this thing. It sounded like science f
tion. Then they ran a huge randomized clinic
trial, and they beat the standard of care. The
was longer survival by a few months of patien
who wore this. So it hit the market, and then
had some uptake. It does a few hundred milli
in sales. They just got approved for mesoth
lioma, where you wear the device on your che
I looked at it, and I thought, what are t
odds electromagnetic fields—if they benefit y
in both brain cancer and mesothelioma—th
they’re going to benefit you in a whole bunch
other cancers? It works in two cancers. I bet
works in more. I don’t know if it will be three
four or five or 10. The nice thing is, we’re goi
to find out, because they have three readouts
the next two years in lung cancer, pancrea
cancer, and ovarian cancer. And they’re lat
phase trial readouts. We have a moderate-siz
position. I think a lot of people are going to lo
at each other and say, wow, maybe we need
really take a look at this.
What happens in biotech investing is, if y
can find things that are kind of off the radar, pe
ple don’t really understand them. Who covers th
stock? Is it biotech analysts or medtech analyst
It’s a hodgepodge. No one really knows whi
area it fits in. People don’t know how to look at
so in a world where there’s a million other inve
ment opportunities, people have kind of looked
other things. And I really like that recipe.
because you’re probably increasing volume.
Nearly a third of your portfolio is in biotech.
How do you pick biotech companies?
Part of our investment philosophy in biotech is
that it’s a risky sector. Sometimes when we like
an idea, we put a limited amount of money to
work, but we don’t bet the whole house. And then
when that first card turns, and it turns as we
thought it would turn, then we feel good that that
has not only de-risked the commercial viability of
the company but probably the rest of the pipeline.
So we allocate more capital to that idea.
So when trials turn out well for a preclinical
biotech company you’ve invested in, you
double down?
Yeah. I mean, obviously, we can break all the
rules, because if something gets way, way more
expensive, at that point you wouldn’t want us to
invest in it. But usually it’s the case that when
these companies get de-risked, very often they
can be a better buy with the new information
than they were at a lower price without the new
information. A number of our large biotech posi-
tions have grown exactly like that. We have a lot
of SageTherapeutics [SAGE]. That started as
a small position, and they’ve since had a product
approved. It’s become a big position [2.4% of the
portfolio] in part because the stock’s gone up,
but in part because we felt more comfortable
about allocating more capital.
There is so much innovation going on right
now in health care, and especially in biotech and
drug development—things that we once thought
were science fiction. I really believe that the
next 20, 30, 40 years, you’re going to see very,
very significant innovation in the field of medi-
cine and therapeutics and biotech.
And what does that mean for investors?
There’s going to be plenty of investment oppor-
tunities to bet on new therapies that make a
huge difference to patients and ultimately gener-
ate huge financial returns.
You’ve got a lot of money in relatively sexy
biotech companies, but many of your big-
gest holdings are in decidedly unsexy medi-
cal devices. What’s the appeal?
What we’re trying to do is put together a diversi-
fied health-care portfolio for our clients. At any
given time, there’s going to be a different level of
rhetoric around the macro issues, like drug pric-
ing or Medicare for All. So what I like about a
company like [medical supply manufacturer] Bec-
ton Dickinson [BDX] is that it’s somewhat un-
correlated to all of that. It’s a very defensive busi-
ness It’s basically the cost leader in basic health
makes it immune to price pressure in the system.
What I like to do with some of the biggest po-
sitions in the portfolio is to find companies that
can steadily and defensively compound growth.
They’re lower-beta than some of the biotechs, but
I think they’re really good businesses. Really
good businesses can be sexy or unsexy.
Thermo Fisher Scientific [TMO] makes life-
sciences tools and drugs for biotechs,
among other things, and is one of your five
largest holdings. Thermo Fisher equipment
is everywhere in biotech labs.
Exactly. Thermo Fisher is a way of taking a bet
on the whole sector without taking individual
risk. There have been hundreds of IPOs in the
last five or six years in biotech. They aren’t go-
ing to do their own manufacturing. There are
more and more of these smaller companies that
will need to outsource this. The life-sciences
tools business is an oligopoly business, where
there’s a handful of players that you have to go
to. The manufacturing business in biologics and
gene therapy is the same thing. And so it’s a
way of benefiting from all of that innovation.
You just got into drugmaker Roche Holding
[ROG.Switzerland] in a big way. What do
you like about the stock?
When you look at the 12 or 14 big pharma
names, I reckon this is one of the two or three
most innovative. They have the best pipeline in
the business. But the issue for them was that
they have three very large products that make
up $20 billion-plus in revenue which are going
off patent. So the issue was, you have a base
that is ultimately going to erode. But then you
have this amazing pipeline and new product
launches that I wanted to bet on, like Ocreli-
zumab for multiple sclerosis, or Hemlibra for he-
mophilia, which we feel really good about.
Ultimately, we felt good enough about the
terminal value on the eroding product and the
success of the commercial launches and the pipe-
line, combined with us getting the stock at a
very reasonable price/earnings multiple.
You’re heavily invested in managed care,
with 7% of your portfolio in UnitedHealth
Group [UNH], 3% in Anthem [ANTM], and
2% in Cigna [CI]. What about the risk of
Medicare for All?
If you think about the underlying fundamentals of
all these companies, most of them are growing
earnings at double digits; they’re all trading at
this point at P/E ratios that are at the low end of
their five-year historical averages; they’re all very
free-cash-flow generative. Their fundamentals, for
the most part, are really good.
But what you’re faced with is some tail risk
“Reallygood
businesses
canbesexy
orunsexy.”
ThreeStocks
BakriLikes
Becton
Dickinson/
BDX
Recentprice:
$251.38
Novocure/
NVCR
Recentprice:
$68.73
UnitedHealth
Group/
UNH
Recentprice:
$264.63
Source: FactSet