Fernando Luque, editor of Morningstar.es, a sister site of Morningstar.co.uk, talks to Michael Sjöström, manager of the Pictet Biotech and Pictet Generics funds about how the US healthcare reform as well as broader demographic and economic trends could influence investments in healthcare. Healthcare companies grow due to three factors – aging population in developed markets, accumulation of wealth in emerging markets and innovation, says Söjstrom. The biotech and generic segment of the market are influenced to a different degree by these factors, he explains.
Fernando Luque: Hello, I'm Fernando Luque, Editor for Morningstar and I am joined today by Michael Söjstrom, manager of the Pictet Biotech and also manager of the Pictet Generics. We are going to discuss both funds with Michael. Michael, thank you for being here.
Michael Söjström: Thank you.
Luque: Michael, my first question is about the healthcare reform in the US, and I ask you this because both funds are invested in US equities, and I would like to know how this healthcare reform could affect the biotech industry but also the generic industry and maybe there is no effect, but in any case, can you explain for European audience what are the major points of this healthcare reform in the US?
Söjström: I will do my best. I think the reform is first and foremost is a healthcare insurance law. It is a law that forces healthcare insurers in the United States under certain provisions to grant coverage to whoever wants it. So, that’s the basis. In order to fund this, the government has edicted a certain number of laws and rules and some of these called for increased taxes. Some of these taxes are touching the general public, businesses, and more specifically, the healthcare industries. So to that extent, there is an impact on some of the healthcare industries that they have to pay a tax to fund this particular reform.
There is a positive aspect to this at least from the industry perspective, and that is that a large number of citizens are now going to be eligible for coverage. So you are getting several millions of additional consumers into market and that should affect volumes positively. Our assessment is that in both cases there is a positive element, which is this volume element. There is a negative element, which is pressure on prices and additional taxes. I would say that for the biotech industry, it’s probably close to a wash. For the generics industry, it’s probably more beneficial.
Luque: Okay, let's talk now about the investment process. What process are you using to select companies for the biotech fund and is this process very different from the one you use to select companies for the generic fund?
Söjström: The criteria are different but the process itself is the same. We are really looking at investing into companies based on their own merits, so it's a bottom-up process. We want to have a very focused portfolio. We think that is one of the keys to investment success in the long term, at least it’s been in the past. Now, in terms of the criteria used, it’s clear that on the biotech side we are really looking more into science, into clinical trials, likely outcomes and things like that, whereas in the case of generic drug makers, we are looking more into a breadth and depth of a product portfolio, geographic exposure, company overall strategy.
Luque: And finally, what are the main drivers for the future returns for both funds, I mean for the biotech industry, for the biotech fund and for the generics fund?
Söjström: Okay, generally speaking, healthcare companies grow and will continue to grow based on exposure to three factors. One is demographics in the West. So, aging population consumes more drugs and health services. The second is innovation. As an industry discovers new medication, new devices, new commercial opportunities are opened up. And thirdly, it is the growth of disposable income in emerging markets that really has become one of the major growth factors for all healthcare industries. We think that biotech companies are primarily going to grow based on their innovation capabilities and generic companies are growing based on their exposure to emerging markets and partly to the aging population in the West.
Luque: Okay. Well, thank you Michael for this interview and for your thoughts on the biotech and on the generic segment of the market.
Söjström: Thank you.
Luque: Thank you very much, Michael.
Söjström: Thanks.
