Barron\'s - 22.07.2019

(C. Jardin) #1

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

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