Holly Black: Welcome to the Morningstar series, "3 Stock Picks." I'm Holly Black. With me is Paul Major. He is co-manager of the BB Healthcare Trust. Hello.
Paul Major: Hi.
Black: So, you've got three healthcare stock picks for us. Where would you like to start?
Major: Okay. Well, let's start with Illumina. So, all three of these stocks are really around the changing healthcare paradigm. So, Illumina – the best way to think about Alumina is, it's the Microsoft Windows of the genetic age. So, we're going to see genetic information, use more and more to understand diseases, understand your risk of disease and understand how best to treat somebody. I know that there are hundreds of diagnostic companies developing thousands of different tests for all sorts of different diseases. Generally speaking, the vast majority of these things actually run on an Illumina machine in the background, and it's their technology that drives the analysis of all that information. So, as the price of gene sequencing goes down, you see it used more and more frequently, and that means Illumina will sell more and more machines and it's a marketplace that is going to grow sort of 15%, 20% a year for the foreseeable future. They have a 90% market share of gene sequencing.
Black: And I'm guessing one of the real benefits of this kind of company is, it's quite a sticky customer base, a whole hospital or the entire NHS, it's not going to move its system when it's got one that it trusts.
Major: Well, yeah, which is why the software analogy in many ways is perfect, right? There are lots of IT people who say Windows is not the best computer operating system, but it's so ubiquitous that it becomes the gold standard. And you're absolutely right. That's what's happened with Illumina. They've managed to simplify the technology and make it reliable and cheap before anybody else did. And in so doing they've created a whole ecosystem around them. So, there's all these other companies creating the demand for the tests, and then buying their machines to facilitate doing that and all that sort of things. So, yeah, it becomes that sort of closed ecosystem built around their technology.
Black: Okay. What's stock number two?
Major: Stock number two is a company called Anthem. So, if you accept that the healthcare system is going to change, an obvious question is, who benefits in the first instance from those challenges? And the simple answer to that is the person that pays the bill. And in the US, generally speaking, that will be an insurance company, either managing government business or managing private, you know, employer-based insurance. Now, Anthem is a is a funny company. It's sort of an agglomeration of lots of other companies that wasn't very well run for a long period of time, got a new management team and had a bunch of contracts that were very onerous. That meant it was operating one hand tied behind his back, is now free of those contracts, it has the opportunity to reprice its book of business and gain significant amounts of market share. Insurance is also very cheap because of all the political overhang that's been going on in the US around the election. There's Medicare for debate which we're very relaxed about. So, insurance stocks generally look cheap, and Anthem looks particularly well placed within that group moving forward over the next couple of years.
Black: That's interesting because I think of insurance as more of a stock for financials fund not a healthcare one.
Major: Well, healthcare insurance is all about basically managing risk, managing healthcare risk. So, understanding who you've got in your books of business, what their risk profile might be, and helping them avoid getting sick in the first place. We all understand the relationship between a guy and obesity and exercise and all those sorts of things. There's lots of simple things you can do actually to reduce people's risk of disease, why they're being looked after by you. In doing that you reduce your costs, and in doing that, you obviously increase your profits.
Black: Yeah, make sense. Okay. What's our final stock?
Major: So, the final stock, kind of a related theme is a company called Teladoc, which is a telemedicine company but it's also the leader in something called – well, two things – electronic triage and case management. So, if you talk to any big health system, in any country, even the NHS if you look at their 10-year plan they published recently, it's all about the idea of what we call digital first. So, when you first go to the doctor, you create kind of a digital footprint that follows you through the system and enables the system to track you and direct you to the lowest cost of care. Meaning, you don't get overtreatment, or you do receive all the treatment that you need, again, hoping to keep things simple and not have complications further down the line.
Now, if you talk to any of the big healthcare systems, they will tell you they expect you roughly in the future, say, 10, 20 years from now, two-thirds of people will be electronically triaged, and case managed. If you look across the globe today, it's probably more like 1% or 2%. So, this is a market-leading company in a marketplace that's going to expand in size 50 or 60-fold.
Black: But I think that's what people want as well, because you want the convenience of not having to talk to someone or not having to leave work early to go to the doctors, if you can do anything from an app or anything is…
Major: Well, particularly for younger people, they always have an expectation that everything is available digitally. But it's managing that journey. So, human beings are incredibly unreliable and irrational and we make terrible choices about – you know, if you got a child and your child is sick, and you can't get an appointment with your GP, you're going to go straight to the hospital. And the cost of the NHS, if you go to A&E, are like 3 or 4 times higher than if you went to your GP. So, that's just an example of if you can give people reassurance easily, or if they do actually really need to go to the hospital, you can tell them to go straight away so that if it's a complicated thing, it gets addressed. That's the way that you avoid cost and at the same time also save costs where necessary in a simple and effective manner. So, this is going to be absolutely the way the whole market goes. And Teladoc is the leader in terms of its global footprint, but also in terms of the way it's deployed this technology in the US market today.
Black: Well, thank you so much for your time.
Major: Thank you.
Black: And thanks for joining us.
