Health-care investing specialist Andrew Waight says that the biotechnology sector is getting ahead of itself and it's time to pare the exposure.
"Valuations have moved up tremendously for major biotechs. The index was up 40% in 2012, and year to date is up 50%," says Waight, manager of the $260.4-million CI Global Health Sciences Corporate Class and a Toronto-based principal with Altrinsic Investments, a sub-advisor to CI Investments Inc. "And it's been driven by exciting new drugs. Two launches have captivated investors over the last 18 months."
For instance, Gilead Sciences Inc. GILD has attracted investors because of a hepatitis C medication, tentatively known as PSI-7977, which has yet to be approved. "It's a combination pill you would take once a day. And importantly, it's a cure for hep C," Waight says.
Waight owns Gilead, which is up over 100% in the past year, but has reduced the exposure. "As the valuations moved up, we trimmed it," says Waight, who attributes some of the run-up to Gilead's US$11-billion acquisition of Pharmasset Inc., which invented the hep C medication.
But it's a tale of two markets. Waight has avoided U.S. hospitals and insurers because of the uncertainty surrounding the Affordable Care Act. "It's the biggest change since Medicaid and Medicare were introduced in the 1960s. There is the potential for collateral damage to some of these sectors," says Waight, adding that legislation is forcing millions of uninsured people to buy insurance or pay a penalty. The bottom line, argues Waight, is that the insurers will be far more regulated and the aim of controlling health-care costs will fall by the wayside.
By carefully dodging potential problems and sticking with names that reward but require patience, Waight's 4-star rated fund has excelled. For the 12 months ended Oct. 31, the fund returned 52.6%, versus 35% for the median fund in the Health Care Equity category. Over three, five and 10 years, it similarly delivered a top-quartile performance. This takes into account a dismal 2011, when the fund was flat and ranked in the fourth quartile.
"Health care has lately done very well, so we've benefitted," says Waight. Secondly, he attributes the performance to a mixture of names, including turnaround situations, so-called Big Pharma, biotechnology stocks and a few eclectic health-care providers.
It's also important to note, he adds, that 2011 was a bust because some turnaround names, such as the medical-device maker Boston Scientific Inc. BSX, stumbled badly.
"We were early in a lot of names," says Waight, who takes a long-term view and had portfolio turnover of 34.6% for the year ended March 31. "But Boston Scientific has been a very strong performer over the last 12 months. They've brought on a new management team and some of their businesses, such as stents, have stabilized. Going forward, they are introducing a raft of new products, such as a catheter device to treat asthma."
Waight has a background in science and business that has proven to be a good fit. He graduated in 1986 with a BSc in genetics at the University of Western Ontario. Two years later, he earned his MSc in biochemistry at UWO. But Waight decided to get an MBA after he realized that he was not enamoured with working in a lab. "Talking to test tubes all day long was not me. I wanted something that could combine my love for business with my love for science."
After he graduated with an MBA in 1995, Waight joined Waterloo, Ont.-based Mutual Group's Mutual Asset Management Inc., where he began as an equity analyst for the firm's U.S. large-cap fund. Then he was appointed co-manager of Premier Growth, a Canadian small-cap fund. In 1997, he joined Toronto-based BPI Capital Management Inc., where he managed BPI Canadian Mid-Cap and co-managed BPI Canadian Small Companies.
When CI Fund Management Inc. purchased BPI in 1999, Waight joined the Signature funds team. In 2000, he assumed responsibility for the global health-sciences mandate.
A bottom-up investor, Waight owns about 45 names, and limits single holdings to about 6%. And while he is sensitive to valuation, he maintains that the science comes first.
"It can be screwed up by management, as we have seen in the early stages with some firms," he says, referring to specialized enzyme replacement therapy drug-maker BioMarin Pharmaceutical Inc. BMRN, which required a management change to boost the stock. "But eventually they will shine through."
About one-third of the portfolio is in large drug-makers such as London-listed GlaxoSmithKline PLC. After lagging the health-care sector as a whole, stocks like GSK began to come back into favour in 2011 when investors shrugged off concerns about drugs going off-patent.
"They are not necessarily coming up with brand new wonderful drugs. But now the market is looking forward and there are no large drugs going off-patent to a great degree," says Waight.
What's more, management has discovered shareholder value, by buying back shares and raising dividends. In the case of GSK there is a 5% dividend yield. "If you hold them, you will get a good return," says Waight. "What will move them further is good news out of the pipeline. But we have to be patient."
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