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Inside the biotech playbook of a Janus Henderson fund manager

Andy Acker, portfolio manager at Janus Henderson Investors, says “medicine runs in my family, in my blood”. Not only are his parents doctors, but he comes from a long line of physicians. This helped spur a curiosity in healthcare from an early age. However, medicine was not always his only area of interest.   

“I followed the market for a long time, [while also] studying biochemistry and economics as an undergraduate at Harvard,” Acker says, explaining that he was always of two minds whether to become a physician, or to explore the business side of medicine.

“I actually went and watched my father perform some surgeries,” Acker explains. However, he soon learned — after fainting in the operating room — that he could not stand the sight of blood.

The prognosis was clear. Acker was to go to business school.

“I felt that I could have a bigger impact as a healthcare investor than I could as a practising physician, and I think that's actually turned out to be true, which has been really gratifying about my career,” Acker explains.

 

“I felt that I could have a bigger impact as a healthcare investor than I could as a practising physician and I think that's actually turned out to be true, which has been really gratifying about my career” - Andy Acker

 

Joining the firm

After completing his studies, Acker spent three years at Morgan Stanley, working in capital markets and investing in healthcare as a venture capitalist. He then attended Harvard Business School, and in 1999, joined Janus Henderson as an analyst covering biotech and pharmaceuticals, just as the firm was launching the Janus Henderson Global Life Sciences [JAGLX] Fund.

The strategy, since its 1999 establishment, has accumulated over $10bn in assets. It has delivered a five-year annualised return of 10.57%, placing it among the top third among its peers, according to Zacks Equity Research. Roughly 30% of the fund is invested in biotech, while the rest is balanced across pharmaceuticals, healthcare services and medical devices.

By 2003, Acker became the assistant portfolio manager on the Global Life Sciences strategy, before taking over as lead portfolio manager in 2007.

30%

Amount of the fund invested in biotech

  

How Andy Acker approaches a biotech investment

Biotech isn’t the easiest of areas to invest in. Understanding the companies and the products behind them is crucial in finding a worthwhile investment. Acker takes the fundamental research side of his work to heart.

His investment approach is to “understand the science and the business”. This is why three members of his team have PhDs across immunology, medicinal chemistry, and medical engineering. “Our team has seven senior analysts with more than 100 years’ of combined experience investing in the sector,” Acker says.

Finding a drug that will make it through all three phases of clinical development and get regulatory approval is challenging, and means that Acker and his team have to approach fundamental research with rigour. Understanding the enormity of this task is put into perspective when you realise that 90% of the drugs put into human clinical testing will never make it to market.  

Acker also employs a “Value at Risk framework” that he says is “designed to mitigate the impact of what we call binary events. For example, if a new therapy is being developed, it could fail in a clinical study or may not get approved by the regulators. Those would be binary events because there are only two potential outcomes:  a product is either successful or it's not,” Acker explains.

Once a company has been considered viable, then Acker and his team apply financial modeling to ascertain whether they’re worth investing. “We use a discounted cash flow approach for all of our companies and look to invest in those stocks that we think are trading at least at a 25% discount to our estimate of intrinsic value,” Acker says.

“The opportunity for a deep fundamental research approach applied by analysts that can understand the science and the business and try to discern which products will be successful is much greater than it was when I started 20 years ago,” Acker reflects.

“The opportunity for a deep fundamental research approach applied by analysts that can understand the science and the business and try to discern which products will be successful is much greater than it was when I started 20 years ago”

 

Drug pricing remains key concern

Another part of Acker’s approach is spending time out in the field. Physicians make decisions that affect 80% of healthcare spending.

Meeting key industry leaders such as those one might find at the JPMorgan Healthcare conference is, therefore, a significant part of research. Acker and his team were some of the 9,000 attendees who took part in discussions in this year’s event in San Francisco, which took place over four days in January.

“There's a lot of noise related to drug pricing,” Acker notes when describing the event. ”What's interesting is that we believe it's not really an issue of drug pricing itself, because net price changes have been low and even negative over the last couple of years,” he says.  “It’s more a concern about rising out-of-pocket expenses.”

“There's a lot of noise related to drug pricing. What's interesting is that we believe it's not really an issue of drug pricing itself, because net prices have been low and even negative over the last couple of years. It’s more a concern about rising out-of-pocket expenses.”

 

The value of innovation

In the last three years, 150 new medicines have been approved in the US — almost double vs. a decade ago. Acker highlights new gene therapies as being “extremely exciting” for their potential to cure a genetic disease with a single treatment. He also finds immuno-oncology drugs (harnessing the body’s immune response to help combat tumours) and new modalities of treatment, such as RNA-based therapies, as promising areas.

“There's just a tremendous level of innovation coming out of small and mid-cap biotechnology companies. This is leading to an increase in M&A activity,” Acker explains. In the last few months of 2019, Alexion Pharmaceuticals [ALXN] acquired rival Achillion Pharmaceuticals, with Novartis [NVS] agreeing to buy cholesterol-drug maker The Medicines Company [MDCO].

The year wrapped up with two more deals aimed at bolstering the cancer-drug offering of two of the world’s biggest drugmakers, when Merck [MRK] acquired ArQule [ARQL] and Sanofi [SNY] acquired Synthorx [THOR].

The news of the deals helped drive a rally across the sector. The iShares Nasdaq Biotechnology ETF [IBB], which had slumped to its lowest point in 2019 in early October, climbed 27% from 2 October to reach an all-time high of $123.50 by the 24 December 2019.
This desire by pharmaceutical giants to absorb new and innovative propositions seems unlikely to wane any time soon.

“We think the appetite of large companies to continue to acquire innovation remains high", Acker notes, pointing out that the top 20 biopharmaceutical companies are “generating over $150bn a year in free cash flow”.

“We think the appetite of large companies to continue to acquire innovation remains high”

 

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