US political rhetoric is weighing on short-term sentiment in the healthcare sector as concerns grow about potential drug pricing reform and the impact of Medicare for All, Polar Capital's Jamie Douglas said, but added that despite these short-term concerns, the fundamentals for the healthcare industry are strong.
The manager of the $84.4m Polar Capital Healthcare Blue Chip fund said the affordability of healthcare will be a focus for both political parties with the selection process for the Democratic candidate to take on US President Donald Trump underway.
"Addressing the high cost of pharmaceuticals in the US is something that appears to have bipartisan support and we believe there could be some progress on drug pricing in the coming months," Douglas said. "While the exact mechanics are difficult to predict at this stage, the uncertainty does appear to be a short-term investment headwind for the pharmaceuticals and biotechnology sub sectors.
"In terms of Medicare for All, we believe the disintermediation of the US managed healthcare industry is highly unlikely given the complexity, potential disruption and cost implications, but acknowledge that sentiment is weighing on the healthcare insurance companies' valuations," he added.
As at the end of August, the Polar Capital Healthcare Blue Chip fund had a significant overweight to healthcare equipment, reflecting the manager's views on a strong innovation cycle, accelerating top line momentum and P&Ls that can deliver operating leverage. The fund was underweight pharmaceuticals due to concerns over drug pricing and the lower potential for upside on margins.
"Over the past 12 months, we have been reasonably consistent in where we are constructive and where we see challenges. Over that period, we have increased our exposure to the healthcare equipment sub sector and decreased our exposure to pharmaceuticals and biotechnology," Douglas explained.
"Our positive stance on the healthcare equipment sub sector reflects an industry that is innovating and delivering accelerating top-line growth. Clearly one size does not fit all, but the relative underweights in pharmaceuticals and biotechnology are based on a view that the industry has mature product portfolios and is carrying peak margins that leave less room for upside surprise."
The healthcare team at Polar Capital expects sentiment swings in the healthcare sector to continue over the coming 12 months, partially due to US politics.
Douglas said: "We believe the current pressure on healthcare valuations in the US is being driven by sentiment as opposed to deteriorating fundamentals. With valuation support, now could be an interesting time to engage in a sector that is highly innovative, is adapting new technologies and has a defensive growth profile."
He added that, should the industry fundamentals remain intact and positive innovation cycles continue, the team could use unwarranted valuation stress as an opportunity to increase exposure to healthcare insurance and bio-pharmaceutical companies, which are developing differentiated medicines.