Why we don't bet on blockbuster drug approvals - focusing instead on durable companies that are helping to manage costs across the healthcare system
Transcript
| Chris Davis: | Healthcare is an industry where demographics tell a powerful story. And we know that healthcare spending is going to continue to grow as the population ages. We also know that it's an industry that's characterized by enormous innovation. And a lot of investors approach it with this mindset of the lottery. 0:20 You know, people buy a lottery ticket and, you know, somebody pays a dollar and ends up with a $10 million prize. 0:26 That's very alluring to other investors. That's not the way we approach investing in healthcare, right? We think of the tailwinds in healthcare, but we think about how do we approach it in a disciplined way that allows us to participate in the growth, but not pay these huge prices for lottery tickets that maybe you'll get the next miracle drug. So Danton has been covering this industry at our firm for really a quarter of a century now. And it's interesting to have been during that period watched as the opportunities that we've been able to position ourselves for take advantage of in healthcare have evolved over time. So I think Danton can really share some perspective on how we see the opportunity in investors for investors in healthcare today. | |
| Danton Goei: | Yeah, the opportunity is huge, of course, given the size of the market, the population involved, the aging demographics, all the technological changes that have happened over the years. I feel like we have a great team here. I mean, I'm experienced, but we have Darren Proze's leading our healthcare efforts. Say, so we have a lot of experience in-house. And then we look at trying to think of where do we want to invest, where the risks are. We've decided we don't want to take single product risk. Like you said, there are lottery tickets out there to be had, but when you try to build portfolio, you don't want to have zeroes in the portfolio. There are a lot of risks with those type of companies, and so we really focus on durability. What are the durable companies, the durable services that are critical to the healthcare system, that we are confident will be relevant, important, and very profitable 5, 10, 15 years from today. And so when we look at the industries, the sub-sectors that we are in, we're in lab companies with quest diagnostics, interesting fact, there is lab companies only count for three or four percent of healthcare spend, but influence 70 percent of healthcare decisions. So hugely important to the healthcare system, we manage care companies, their job is to control costs and increase efficiency, and so we own humana and sigma in that space. We own also companies that bring down the cost overall for drugs, so generic companies, companies. And there we own Viatris, And Viatris is, you know, it's a, it's a company that was built by the merger of Pharmacy Up John's, a branded drug company, and then Miland's generic company. And together, that company is really interesting today because as a value investor, you look at this business, it's global, it's absolutely necessary as one of the largest generic companies out there, but it's trading at five times earnings, right? | |
| Right, when you have a company trading at five times earnings, generating close to high teens free cash flow yield, and you think that the company has promised that half of that money is going to be shared with shareholders in terms of dividends and share repurchase. | ||
| So it's eight, nine percent returning back to shareholders every year. Well, that's already a very high return. And then the other 8% or so that's being used to acquire companies and invest for the future you only need a very small return on that to get a great return given you already getting 8 or 9% from the company every year. So that's another great investment opportunity out there. We also own Solventum, which is a recent spinoff from 3M. | ||
| Spinoffs are really a great way to find undervalued opportunities out there because suddenly you own 3M, now you own this 10% of the overall business and it's not relevant in your overall portfolio and so a lot of the manager will just sell it and so your company is like us can find really attractive valuations by looking at the spin off market. Just wrapping up on healthcare, when you look at the holdings, we're really focused on durability above all, and thinking about the companies that are adding value to the system by either managing costs in the system and improving efficiency, or moving drugs to generics, and taking out drug costs. That is our long-term focus when we look at healthcare. |
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