American Century Investments (ACI) is snapping up early-stage medical companies amid recent market turmoil, as part of its strategy to generate positive financial returns as well as positive social impact.
ACI's Health Care Impact Strategy won Social fund of the year, Global in Environmental Finance's 2022 Sustainable Investment awards.
Michael Li, the portfolio manager, says that a recent market sell-off in the health care sector, particularly in the biotech industry, induced by inflation fears, has provided ACI with newly affordable investment opportunities.
"Recently, we have seen a sell-off in the market. Suddenly, we have seen a lot of companies in the biotech space trading close to cash levels, which makes these stocks very attractive, especially as many of these companies have amazing assets in the pipeline. So, we've seen lots of interesting opportunities recently," Li says.
"As a result of the sell-off, we are seeing more mergers and acquisitions, where [pharmaceutical giants] Bristol Myers-Squibb and Pfizer have all made recent acquisition deals of the smaller peers."
Li adds: "Inflation has been a key reason for the market sell-off...our fund has high exposure to early-stage, rapid growth companies. It has negatively affected our portfolio returns, but we are remaining steadfast in our approach...in general, we stay with companies we like, but also, we are taking the opportunity of the market correction to invest in companies that were too highly valued in the past."
The strategy has its largest holdings in medical giants UnitedHealth Group and Bristol Myers-Squibb. However, it also targets smaller companies, as they are typically "more efficient with capital and more effective with innovative research and development work," compared to larger companies that can "waste funding" as they are typically "more bureaucratic", says Li.
The $1.53 billion fund invests in 30-50 healthcare companies, many that have yet to commercialise drug solutions. Li observes that "patience" is key to scaling smaller healthcare companies, as they each take a decade on average to reach the commercialisation stage.
The strategy aims for its investee companies to reach hundreds of millions who are suffering– from cancer to hearing loss.
Over 40% of ACI's dividend - $1.8 billion since 2000 – has gone to the Stowers Institute for Medical Research (SIMR), a biomedical research organisation and the largest owner of ACI.
Li acknowledges it is risky to invest in early-stage medical sector companies and comments on the importance of "risk control". He highlights the importance of diversification, spreading investment across 30-50 holdings, and "following the science". Li advises looking closely at the scientific foundation of a healthcare company in comparison to its peers, to contextualise if it's on track to beat competitors throughout the development process.
Commenting on the fund's investment horizon and unique ownership structure of ACI , Li says: "The goal is solely for longer-term returns. Maybe [our shares] can turn some of SIMR's research into scientific discovery and, eventually, treatment options for patients. But that takes a very, very long time. We want to continue to support research efforts that benefit the whole humankind."
Li continues: "When investing in this space, humility is one thing we have to have, because epic failures are inevitable when you are investing in scientific discovery.
"For example, some companies had great promise, but failed during the execution. It might have been that the pace of progress was slower than expected and they got overtaken by competitors. That often happens. We are always constantly assessing and reassessing the progress made by companies."
Each company in the fund is reviewed against four portfolio impact themes aligned with the third UN Sustainable Development Goal: 'Ensure healthy lives and promote wellbeing for all at all ages.'
These four impact themes include: access to medicine and healthcare services (which ACI says 73% of its portfolio companies address), new or innovative treatment for diseases, including cancer (68%), more productive medical equipment, services and software (49%) and new solutions for lowering health care costs (27%).
Portfolio companies include Teladoc Health, UnitedHealth Group, MicroPort Scientific.
Over half of the fund (57.04%) is split fairly evenly across its top 10 holdings, with its largest investment – UnitedHealth Group – making up 8.46% of the fund's assets. The fund's top 10 holdings are:
- UnitedHealth Group – Health Care Providers & Services
- Bristol-Myers Squibb – Pharmaceuticals
- Intuitive Surgical – Health Care Equipment & Supplies
- Danaher Corp – Life Sciences Tools & Services
- Abbott Laboratories – Health Care Equipment & Supplies
- Regeneron Pharmaceuticals – Biotechnology
- Edwards Lifesciences - Health Care Equipment & Supplies
- CVS Health - Health Care Providers & Services
- Roche Holding – Pharmaceuticals
- Zoetis – Pharmaceuticals
