Fund Managers’ Favourites: Hot Healthcare

Joining me now to talk about investing in healthcare is Gemma Game from AXA Framlington. She manages two funds, specifically in biotech and healthcare, that have done very well over the past several years, and she joins me for this Fund Managers’ Favourites episode to talk about her favourite top picks.

So, Gemma, thank you very much for coming in.

Gemma Game: Thank you.

Petroff: Now tell me about how you got into healthcare investing. Did your boss just say, 'yes, healthcare, take that'?

Game: It's been something that I've always had a deep interest in. I studied pharmacology at university. So for me, being a healthcare fund manager is the perfect marriage between using my scientific background, but also participating in the broader economy.

Petroff: And you have three top picks right now. You have researched them very thoroughly and you are buying in right now as well, which is very important for this. So, we have CVS Caremark Group (CVS), Covidien (COV) and Insulet Corporation (PODD). Let's start with CVS Caremark, why do you like them?

Game: CVS Caremark is a US-domiciled company that operates predominantly in the US and it's got two main divisions: the retail pharmacy chain and the pharmacy benefit manager chain. It's experiencing fantastic growth at the moment and is on a very, very reasonable valuation. And I think there's a case for upside.

For the retail pharmacy, we've seen a very strong flu season this winter in the US, and that really favours the CVS retail pharmacies as there will be an increased level of traffic through their stores as people get prescriptions, over-the-counter medicines and any additional front-of-store sales.

For the pharmacy-benefit manager division, it's really benefiting from the patent cliff that we are currently living through and the increased utilisation of generics. Longer-term as well, healthcare reform is coming into effect in 2014, and CVS is very well positioned to benefit from the increased utilisation as a result of that.

Petroff: Okay. So, some very good near-term opportunities.

Game: Absolutely.

Petroff: All right. And let's move on Covidien. Tell me a bit about that company and why you like it.

Game: Covidien is best in its class, a med-tech company that's pioneering the transition from traditional open surgery to minimally invasive surgery, which is still quite early in its evolution. So there's a lot of runway for this to go.

Petroff: So how does that work, this minimum invasive surgery? Is this through the belly button?

Game: That's the next-generation minimally invasive surgery that Covidien also participates in called Natural Orifice, NOTES Surgery. The broader trend that's still at play and still in its infancy really is going from very, very large incisions to one-inch, two-inch incisions. It's less traumatic for the patients, they suffer less complications, they stay in hospital fewer days, they recover faster. It's beneficial for everybody in the system.

Petroff: Okay. And let's move on next to your third top pick is Insulet Corporation. I was a little bit confused when I first looked at it because their ticker symbol is PODD, which doesn't seem to match up with the name. So explain this whole thing to me.

Game: Sure. Insulet is another med-tech company. It's domiciled in the US, but it's a global company and they offer market disruptive technology in the field of diabetes. They are unique in offering a disposable insulin pump, and the first generation product that they launched back in the last decade is called the OmniPod and that's why its ticker is PODD.

Petroff: Alright. And why do you like this company so much?

Game: Diabetes, as we know, is a growing category. The use of insulin pumps is increasing in penetration, and it's still got a lot of runway to go, and on top of it Insulet has got a market disruptive technology. So they are taking share in a category that's growing very nicely.

Petroff: What's so great about their product?

Game: It's unlike traditional pumps. It doesn't have a catheter. It's not a large piece of hardware. So the patients can go swimming, for example.

Petroff: It's smaller.

Game: It's smaller, it's lighter, it's less invasive, so the patient doesn't feel like they are living with their diabetes 24 hours a day. They can forget about it. And that extra freedom and flexibility is a significant benefit from a patient's perspective.

Petroff: Now let's move on to the key risks. We just went over why these companies are so great, but what are you a little bit concerned about for each of these investments? So let's start with CVS.

Game: Well, for CVS, because they stand to benefit from any increased utilisation as a result of healthcare reform, any delay in the implementation of healthcare reform would be a risk for CVS. But with President Obama getting a second term, I do view that delayed implementation as being minimised.

Petroff: Okay. And Covidien?

Game: For Covidien, more of a macroeconomic risk. If patients decide that they are not going to go with an elective procedure, then Covidien could see volumes decelerate.

Petroff: And what about PODD?

Game: For PODD, the risk is execution. They've recently received FDA regulatory approval for their next-generation device. So management now faces the challenge of migrating their current installed base from the first-generation to the second-generation device.

Petroff: Okay. So rolling out this new technology….

Game: Exactly. But longer-term, the prospects are so bright for Insulet that I would view any short-term volatility over the coming quarter or so as a very attractive entry point.

Petroff: Okay. Thank you very much for joining me today.

Game: You are welcome.

Petroff: That was Gemma Game from AXA Framlington. To learn more about each of these companies, you can check out our Morningstar research on the website, Morningstar.co.uk. Thanks for watching.