Not all healthcare stocks are created equal. Here are 3 this fundie is backing

Note: This interview was taped on Friday 26 July 2024.

If there is one area of the global equity market that can get an impact investor's tongue wagging, chances are it's healthcare. A swathe of companies, ranging from emerging biotechnology stocks in Phase I clinical trials, to the very largest medicine manufacturers actively work in the business of making life better and longer for us all. 

Nowhere has this become more apparent in recent times than in the GLP-1s space. At the expense of companies like ResMed and Phillips, major drug manufacturers like Eli Lilly and Novo Nordisk are in a race to create a pill that can genuinely and safely accelerate weight loss. And given how widespread the obesity epidemic is, it's a key focus area for professional impact investor and T. Rowe Price Portfolio Manager Hari Balkrishna.

"When you think about, not just the improvement in the quality of life for the individuals taking these drugs, it's also the reduction of the cost to the healthcare system," Balkrishna points out. 

"That's where we think these GLP-1 drugs can play a very important role," he says but also adds that, at the moment, these drugs are not at a cost that makes them accessible to the everyday user. This, Balkrishna says, is the biggest obstacle standing in its way.

In this episode of The Pitch, Balkrishna will introduce us to a Japanese company that wants to actively reduce those barriers. We'll also talk at length about the challenges (and opportunities) of investing in biotechnology stocks. 

Edited Transcript

Healthcare is one of your largest holdings by sector in the fund. Why is healthcare, as a theme, so crucial to an impact fund like yours?

Balkrishna: It's crucial for a couple of reasons, right? First is that a third of the world doesn't have access to essential medicine, so companies must reduce the cost of healthcare access when we think about medicines around the world. 

Secondly, even in countries where there's access to medicine, we have a lot of issues. For example, when you think about dementia, when you think about cancer, when you think about obesity-related diseases, a lot needs to be solved. 

It's really important, from an impact fund perspective, that if we're trying to solve for the sustainable development goals, of which good health and well-being is one of the goals, healthcare stocks can play a very important role. 

But I also think it's important to qualify. Not every healthcare stock is an impact stock, in our opinion. It's companies that enable healthcare innovation, bring down the cost of healthcare access, or genuinely have groundbreaking healthcare innovation to solve one of those large unmet needs. 

You’ve got a particular focus this year on the GLP-1s space. Why do you think this part of the healthcare sector is worth spending so much time and resources on?

Balkrishna: Firstly, we have an obesity epidemic in a lot of developed markets and increasingly in some emerging markets. For all the press that's out there about the cosmetic aspects of these weight loss drugs, in our view, more than 95% of the use case is basically to address that obesity-related disease issue.

When you think about not just the improvement in the quality of life for the individuals associated taking with these drugs, it's also the reduction in the cost of the healthcare system. If you have fewer heart attacks, you have fewer sleep apnoea issues, and fewer knee replacements or hip replacements because of weight-related issues, it just brings down the cost to the whole healthcare system. That's where we think these GLP-1 drugs can play a very important role. Having said that, they're not yet at a cost point that we're happy with. We think over time, the cost will come down and access will improve to people who genuinely need it. 

What is one company you are invested in with this theme in mind?

Balkrishna: So actually, we do own Eli Lilly (NYSE: LLY), but the one I'd like to talk about is Chugai Pharmaceuticals (TYO: 4519). So this is a company listed in Japan, and the reason we're so excited about is it's going to be the key enabler of bringing that cost of the GLP-1 drugs down. It owns and has created the molecule that enables the oral solution to GLP-1. 

It's called Orforglipron. The next stage trials are going to come out in the spring of 2025. We feel very positive and excited about the potential for the oral version of these drugs, which should bring the cost of these drugs down and improve access. 

You also have a big exposure to the life sciences and biotechnology space - which is a space that requires intense specialisation and very deep knowledge. 

What is your edge in that space and why do you think you can deliver outperformance in this part of the market?

Balkrishna: Firstly, we're blessed in the sense that we have a dedicated healthcare fund in T. Rowe Price, with a lot of analysts and a lot of expertise in the biotech and healthcare space. We're getting a lot of inputs that allow us to make those decisions. 

But most of what we own in the Global Impact Equity Fund are life science tools companies. So companies like Danaher (NYSE: DHR) and Thermo Fisher Scientific (NYSE: TMO). They enable biotech and biopharma companies to innovate better. In some ways, it's a little bit like owning the picks and shovels in biotech. 

As long as there is biotech innovation, as long as there is biopharma innovation and we see the cadence of clinical trials going up, we see the cadence of drug approvals going up and these companies benefit. By enabling that innovation, if you take a company like Danaher for example, they have a huge role to play in the manufacturing of cancer drugs. There's a huge impact there. But also as there's more innovation happening in cancer drugs, they benefit as they go. And you can make that bet without actually owning a single biotech stock, which comes with a fair bit of risk. 

Looking for more than just returns from your investment?

The T. Rowe Price Global Impact Equity Fund targets specific companies that not only make good economic sense, but also focus on making the world a better place for all. Find out more.

Managed Fund

T. Rowe Price Global Impact Equity - I Class

Global Shares

View