Kristine Bryan runs the Schroder Medical Discovery unit trust which was launched last month and inve...
Kristine Bryan runs the Schroder Medical Discovery unit trust which was launched last month and invests in healthcare companies worldwide. Bryan, who works as the global healthcare specialist with the group, talked to Leo Bland.
What are the arguments for investing in the healthcare-related sectors?
There is an unending, inelastic demand for healthcare products. There will also be an increase in the elderly population - those over the age of 65 are set to double as a proportion of the world population over the next 20 years.
Those over the age of 65 consume five times as many pharmaceuticals products as those under 65. The potential increase in demand for medicinal drugs could be huge, especially when you consider the average life expectancy in the West is now around 76 years.
In addition to high demand, there are also high barriers to entry. For example, it costs an average of £350m to produce a new drug and it could take 10 years to develop it.
Plus, only one out of 5,000 drug compounds ever make it to the market.
The steady growth of pharmaceuticals companies is to some extent protected by product patents and by the fact that entry to the market is very costly for new players.
Their challenge is to maintain a steady flow of products that will more than offset products facing patent expiry.
In the pharmaceuticals sector we will look for firms which have already made significant investments both in research and development as well as in marketing.
This is a highly profitable sector - the average gross margin for the pharmaceuticals industry comes in at 60% to 70% while the operating margin is typically 30%.
Over the past few years, the global pharmaceuticals industry has produced sales growth in excess of 9% and earnings growth in excess of 12%.
The medical supply industry is structured in a different way. These companies are looking to prosper because of their enormous distribution capabilities and the steady demand for hospital products
The fact the population is ageing in the West is well known. Isn't this factor and the growth potential it is expected to deliver for healthcare companies largely priced in?
This is well known in terms of the US population but looking outside the developed world to countries such as India and China there are around half a billion middle class, affluent individuals and the pharmaceuticals companies are looking to become more pro-active in this market.
What is your background in fund management?
I have been researching healthcare stocks for 10 years and for four out of those 10 years I have been actively involved in stockpicking for funds. I started in the US on the asset management side for National City Corp and then worked for Warburgs covering US and UK pharmaceuticals.
I then moved to London and worked for Credit Suisse First Boston and covered European pharmaceuticals. For the last two and a half years I have been working at Schroders where I am the global industry specialist in healthcare and US a healthcare analyst.
What is your investment process for the Medical Discovery unit trust?
We base the fund on the assumption that one wants to invest in healthcare and in managing the fund we will aim for a balance between growth and value.
Healthcare is a very broad industry and we prefer to invest in the products side of healthcare rather than areas such as hospital management and handling care.
In terms of the portfolio, the largest sector by far is pharmaceuticals. This will provide stable, long-term growth and make up around three quarters of the fund.
Other sectors we will be investing in will include medical technology, hospital supply and biotechnology. The most important factor is products for these companies as product development drives this industry. We are looking for new drugs which can make up for existing products whose patents expire.
Pharmaceuticals companies that experience poor earnings growth are likely to be those that face patent expiry and have no immediate products in the pipeline. By contrast, there are some very successful pharmaceuticals companies that are experiencing accelerating earnings growth because they have imminent product launches and are not affected by patent expiry.
We are looking for a strong management team and we visit the companies as well as going to medical meetings to talk to the scientific community about whether they think certain new products will succeed.
The majority of investment in the fund will be in the US. We will also be investing in Europe, particularly the UK, and Japan. The US and the UK have some of the leading drug companies around the globe. In Europe, many healthcare companies have other business interests and so as a result may not have the strong growth prospects of their US and UK counterparts
How many stocks will you run in the portfolio and why?
We are going to have about 50 stocks at the beginning and around 80% will be in large cap companies with market caps of $10bn and above. If we go much above 50 stocks it will start to dilute the impact of stockpicking on the portfolio.
After the sectors have gone through our quality screening there are around 125 investible stocks left, excluding biotech. Including the biotech stocks the size of this investible universe goes up to around 150 stocks.
In terms of selecting stocks for my investment universe, I like to look at past performance, see steady earnings growth and also examine the quality of the product portfolio.
How do you work out which biotech and pharmaceutical companies are going to be successful in terms of producing profitable healthcare products?
It is a highly knowledge intensive industry and it takes years of study to be able to understand the complex language of product development.
One also has to understand what is going on worldwide in the industry.
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