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Intermede Investment Partners
About Intermede: Intermede Investment Partners Limited (Intermede) is a fundamental, bottom-up boutique fund management business specialising in global equities based in London, UK. It is the investment manager of the Intermede Global Equities Fund (Fund) issued by responsible entity, Antares Capital Partners Limited. Intermede looks for investment opportunities from around the world for the Fund. Its investments are diversified across countries in both developed and emerging markets.
The healthcare industry can be a challenging landscape for investors to navigate. Sources of difficulty can include the tensions generated when questions of human wellbeing collide with commercial reality and the frequently opaque nature of the processes by which drugs and services are priced and paid for. Additional complexity is introduced by the inherent unpredictability of the drug discovery and patenting processes and vast country-to-country disparities in healthcare systems. It is widely understood, for example, that the US healthcare system pays a high price to deliver sub-optimal outcomes, with average life expectancy currently standing at 79 years. This is against a figure of around 83 years for Spain, Japan and Italy, all of which achieve their outcomes at less than half the per capita cost.1
Also unhelpful to anyone seeking clarity is the emotive and often poorly researched content of much mainstream healthcare journalism, which consistently reduces the quality of public debate. For example, the volume of coverage given to stories relating to exploitative drug pricing, such as that of Martin Shkreli, who achieved global notoriety in 2015 after pushing through a 5,000% price increase on a drug used by AIDS and cancer patients² , can make it easy to forget that drug costs represent only 10% of total US healthcare spending. There is significant leeway to identify attractive investment opportunities in the healthcare sector, which in aggregate represents approximately 11% of the total market capitalisation of the MSCI ACWI Index and contains many businesses with highly attractive economic characteristics, including high profit margins and substantial cash generation.3
When assessing the sector, we adhere to our commitment to investing only in high-quality franchises, capable of long-term, cash generative growth in revenues and earnings, while also aiming to avoid the potential pitfalls the sector can present. We have therefore historically tended to avoid the mega-cap pharmaceutical companies, since exposure to the expiry of patents on blockbuster drugs creates the need for a constantly refreshed pipeline of ‘hit’ products, and makes it hard to forecast a stream of future cash flows with any accuracy.
The economic reality of mega-cap pharmaceutical companies belies the image they seek to present as science-driven research organisations. Instead, spending on sales and marketing tends to outweigh research and development (R&D) spending by a significant margin.
How much does big pharma spend on Research and Development vs Sales and Marketing (US$m)
Source: Intermede Investment Partners based on data taken from 2017 annual reports , 10-Ks and 20-Fs for each business. Figures have been converted to US$ at the average 2017 rate for direct comparability by Intermede.
Given our concerns, we tend to focus instead on healthcare businesses that possess characteristics that allow them to sidestep these problems in some way.
1. Biologics more attractive
One category we find attractive is the growing market for biologic drugs. Whereas legacy ‘white pill’ medicines typically experience a collapse in sales once a generic alternative becomes available (an 85% decline in the first year would not be unusual), the greater complexity of ‘large molecule’ biologic drugs mean that any potential ‘biosimilar’ replacements still require extensive R&D investment, and are subject to rigorous testing. This means the economic lifecycle of such drugs is less subject to disruption. Here, we have expressed our positive view with an investment in Biogen, a leading biotechnology company that focuses on developing therapies for serious neurological, autoimmune and other rare diseases.
2. Look for skilled capital allocators
Secondly, we are attracted to innovative business models, run by management teams that have proven themselves to be skilful allocators of capital over time. The Danaher Corporation is an intriguing case study, having applied its optimisationdriven ‘Danaher Business System’ since the mid-1980s as it undertook a continuous program of acquisitions in the healthcare sector. This involves typically improving financial and operating performance at subsidiary companies, which then return capital to head office to be redeployed into further value accretive acquisitions.
3. Potential for price raising
Thirdly, across our portfolio we are consistently attracted to businesses that supply mission critical items that represent a negligible percentage of their customers’ total costs. These companies have the ability to raise prices steadily over time. In the healthcare sector, our holdings in the medical devices space fit this profile. We note, for example, that one of our current positions, West Pharmaceutical, enjoyed a 100% share in the market for rubber stoppers and plungers used for new drugs in 2017, and that these consumables represented on average just 0.3% of the total cost to deliver the drug.
4. Watch for trends
Finally, thinking laterally can help identify attractive opportunities. For example, owners of domestic animals in developed nations are increasingly tending to treat pets as family members, and are therefore willing to accept higher prices for better and more extensive veterinary care. We therefore initiated a position in Zoetis, the largest global animal health business.
Despite the challenges faced by mega-cap pharmaceutical companies, by looking beyond the index giants we have identified several varied and attractive businesses in the healthcare sector that possess a diverse set of competitive strengths and are well positioned to deliver compelling returns in the long run. We will continue to monitor this fast-evolving sector closely as a source of potential future investment ideas.
1 ‘Link between health spending and life expectancy: US is an outlier’, Our World in Data. Accessed 9 April 2018.
2 ‘Daraprim, used to treat AIDS, malaria and cancer patients, once cost $13.50 a pill. Now it costs $750 a pill’, Huffington Post. Accessed 9 April 2018.
3 MSCI ACWI Index (USD) factsheet, MSCI, 30 March 2018.
This publication is provided by Antares Capital Partners Limited (ABN 85 066 081 114, AFSL 234483) (‘ACP’), responsible entity of the Intermede Global Equities Fund (ARSN 602 927 739, APIR code PPL0036AU, ASX mFund code INT01) (‘Fund’). ACP has appointed Intermede Global Equities Limited (‘Intermede’) as investment manager of the Fund. Before making any decision about investment in the Fund, you should consider the product disclosure statement (‘PDS’) of the Fund available from nabam.com.au/igef or by calling 1300 738 355.
ACP is a member of the group of companies comprised National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686), its related companies, associated entities and any officer, employee, agent, adviser or contractor therefore (‘NAB Group’). Any references to “we” include members of the NAB Group. An investment in any product or service referred to in this publication does not represent a deposit or liability of, and is not guaranteed by NAB or any other member of the NAB Group.
The information in this publication has been provided to us by Intermede, it comprises their opinion and judgment at the time of issue and are subject to change. We believe that the information herein is correct and reasonably held at the time of compilation. However, neither ACP nor any member of the NAB Group, nor their employees or directors give any warranty of accuracy or accept any responsibility for errors or omissions in this publication. Where information contained herein includes information obtained from third parties, we believe to the best of our knowledge, necessary consents have been obtained.
Any reference in this publication to a specific company is for illustrative purposes only and should not be taken as a recommendation to buy, sell or hold securities or any other investment in that company. The Fund may not hold securities of, or any other investment in, any company mentioned in this publication before, at or after the time of publication.
Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market. Any projection or other forward looking statement in this publication is provided for information purposes only. Though reasonably formed, no representation is made as to the accuracy of any such projection or that it will be met. Actual events may vary materially.
This publication may constitute general advice. It has been prepared without taking account of your objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs.
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