Shannan Simmons

Hello everyone. I’m Shannan Simmons, PineBridge’s Global Head of Consultant Relations and Head of Business Development for the Americas. I'm delighted you joined today’s discussion, featuring Rob Hinchliffe, Equities Portfolio Manager and Head of Global Sector Cluster Research, and Chris Pettine, Healthcare Analyst for the Global Equities Team.

We’re thrilled to have you both here again to talk about what’s been happening in your markets and within healthcare in particular. Welcome Rob and Chris and thanks so much for being here today.

Rob Hinchliffe

Hi. Thanks for having us.

Chris Pettine

Thanks, Shannan, great to be here.

Shannan Simmons

Okay, guys, let’s get started. In our last two podcasts, we talked about the implications of US policy on markets and the implications to your asset class specifically. Rob, can you recap your team’s approach and why we believe we’re well positioned to weather market volatility?

Rob Hinchliffe

Sure. Well, we’ve seen volatile markets for the last several years, and that certainly has continued into this year. The most direct way to answer your question is that we don’t position the portfolio from a macro perspective. Trying to get the direction or characteristics of markets right is very difficult to do, and now, more than ever, with how quickly information is changing.

Our goal is to beat our benchmark using the tools that we have, which help with stock selection. There are alpha opportunities in all market environments, and the market volatility potentially helps to create them, too. On the other hand, we try to keep all of the risks very small on a relative basis – things like investment style and currency exposure. That said, the strategy clearly incorporates views from a bottom-up perspective, and Chris can provide his thoughts on healthcare.

Shannan Simmons

Thanks, Rob. And yeah, let’s turn to healthcare. Let’s dive into how the tariffs are impacting the sector. Chris, is there clarity on the implications to healthcare, and what do investors need to know?

Chris Pettine

Yeah. Sure, so regarding tariffs, what we know is that pharmaceuticals, among other industries, like semiconductors, have been targeted by the Trump administration for sector-specific tariffs, or sectoral tariffs. Now, the market is attempting to price in these potential headwinds to sales and earnings as best it can, but clarity is still lacking. We do not know the tariff rate, but we’re hearing in the range of 15% to 25%. We also do not know whether the rate will be applied to lower-value raw materials or API active pharmaceutical ingredients, or will that rate be applied to the higher-value finished dosage forms.

Now on April 14th, the Federal Register listed the Section 232 National Security Investigation of imports of pharmaceuticals and pharmaceutical ingredients. We know now the investigation began on April 1st, and now we’ve entered a 21-day public comment period as of the 14th. The investigation will cover pharmaceuticals broadly, which includes generic drugs, non-generic drugs, starter chemicals, and API. We think the public comment period will raise awareness to the likelihood of even higher drug prices and potential shortages of lower-margin generic drugs. In summary, this is a broad review with little clarity on potential outcomes, and we’ll have to wait to see how this all plays out.

One final note on medical technology; imported medical devices and supplies will be addressed under the broader tariffs on imported goods. Individual companies will be affected based upon their US sales exposure and where they manufacture.

Shannan Simmons

Thanks, Chris. Given policy uncertainties and other question marks, what are the key qualities you’re looking for in healthcare companies today that point to their long-term growth and performance?

Rob Hinchliffe

We’re looking for companies that are better than the market’s view over time. This is our only alpha source, and it hasn’t changed because of the current market environment. And for the companies that we do decide to invest in, our ability to have conviction that our investment thesis will develop as we expect is a key characteristic that we look for. We need to have confidence in the management team’s ability to execute its strategy. So we’re looking at things like its competitive positioning, financial condition, regulatory risks, and, of course, management’s track record too.

Chris Pettine

Adding to Rob’s comments about characteristics and specifically to healthcare companies, the ability to innovate is critical. You need to innovate to stay ahead of the competition, and producing better health outcomes is what drives pricing and reimbursement in the healthcare industry.

Essentially, our process remains the same. We look at the healthcare sector within our proprietary Lifecycle framework to identify mispricings, and we use our ERA, Equity Risk Assessment, to ensure quality in our due diligence review, we invest in those companies where we believe their prospects are underappreciated by the market.

Shannan Simmons

Thanks, guys. Moving on from tariffs, in your team’s outlook for this year, you mentioned other potential headwinds in the US, including the impact of the Inflation Reduction and Jobs Act’s clampdown on prescription drug pricing. Can you talk more about this, Chris, along with other changes or risks to US healthcare policies and regulation that are affecting how you and the team are positioning the portfolio?

Chris Pettine

We are navigating several policy headwinds in the healthcare sector. The IRA allows Medicare, the program for the elderly, to negotiate drug prices for the first time. It will be applied to drugs beyond their period of exclusivity, i.e., their patent protection, and it’s an expanding list of drugs increasing from 10, initially, to 60 or more by the end of the decade. Furthermore, price increases under Medicare covered drugs are further capped at the rate of inflation. These headwinds have weighed on sentiment and caused some PE multiple compression for the pharma sector.

Regarding other policies, the US Medicaid program has emerged as a main target by the Trump administration for budget savings, the program having expanded under the Affordable Care Act and then Covid. In short, fewer federal dollars allocated to Medicaid will negatively impact the health care providers, which include hospitals and health insurance companies.

In terms of portfolio positioning, we are bottom-up investors, and we can take all of these risks into consideration. We are currently underweight the healthcare providers, and we have a slight underweight in pharmaceuticals.

Shannan Simmons

Thanks. Advances in the treatment of obesity, diabetes, cancer, and rare diseases remain a key source of growth amid rising demand in healthcare. How are you and the team positioning for this growth, and do you anticipate a shift in demand or additional opportunities for life sciences companies that supply cutting-edge new technologies?

Chris Pettine

Yeah, so the areas that you’ve mentioned, these are the areas where we are finding opportunities. We find certain disease categories, such as cancer, obesity, and diabetes, immunology, and autoimmune disease, to be large areas of unmet medical need.

Obesity is a major area of development, and it will be a very large market over time.

In immunology, there are rapidly growing markets in inflammatory diseases dealing with skin and gastrointestinal conditions. In autoimmune disease, where the immune system attacks itself, this is also a growing area, for example, treatments for myasthenia gravis and other neurological conditions.

We are finding innovative and profitable companies with best-in-class drugs in these areas. Now, importantly, and in the context of the policy headwinds we’ve previously discussed, governments are still willing to pay higher prices for these innovative medicines.

Lastly, we also like life sciences companies, the companies that supply these drug sponsors with cutting-edge technologies and services. We see demand slowly returning to normal for these companies now that higher inventory levels have corrected.

Shannan Simmons

Thanks, Chris. We can’t have a podcast without talking about AI. AI is transforming the healthcare sector by enabling faster and more accurate diagnostics, drug development, and decision-making processes. Yet at the same time, integration is a challenge. How do you and the team assess current and long-term valuations, given this tension?

Chris Pettine

Sure, so AI transformation of the healthcare sector is still in its early days. AI is being adopted in medical imaging, for example, to help reduce error rates. It is also being utilized in drug research and development. Overall, AI and healthcare remains a work in progress, and we will continue to monitor this exciting opportunity.

Shannan Simmons

Thanks. Rob, we’ve talked about your team’s approach to research in the past episodes and why we believe it acts as a potential risk mitigant in volatile markets. Can you help overlay this with the healthcare sector specifically?

Rob Hinchliffe

Sure, and that’s right. You’ve heard me talk about how, in our view, the traditional way of thinking about stocks, by grouping them by sector, doesn’t, at least in our opinion, offer a consistent way of evaluating companies or offer precision in risk management.

On the stock selection side, there’s such a wide range of different types of companies in each sector, you simply can’t evaluate them all the same. Take consumer discretionary, for example: Toyota and Tesla, very different companies, even though they’re in the same sector. We use our Lifecycle framework to group companies by their maturity and cyclicality, and we have different evaluation criteria for each of our six different categories.

This consistent framework helps us to evaluate companies based on their characteristics and identify differences of opinion between our view of a company and the market’s view. And from a risk perspective, we construct the portfolio such that stock selection is both the primary driver of relative returns and the majority of risk versus the benchmark. This philosophy leads to a well-behaved portfolio that allows us to focus on the long-term investment thesis we have for each investment in the portfolio.

As it relates to healthcare specifically, the key is to evaluate companies based on their characteristics, and not to treat all healthcare stocks the same. Ultimately, the behavior of each individual stock will be driven by its relative growth rate cyclicality. We don’t think it makes sense to evaluate a big, mature, global pharmaceutical company the same way as a growing biotech company, and certainly each would have a different role to play in our overall portfolio from a risk perspective.

Shannan Simmons

Thanks, Rob, and thank you, Chris, for your time. From tariffs to AI, your perspectives were valuable. And thanks also to our listeners. We hope you enjoyed the conversation and invite you to stay tuned for our next episode, where we’ll explore the latest developments in your markets.

For more of our market and investing insights, please visit our website at pinebridge.com.

Until next time, thanks for listening.