Trends Watch: Health Care

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Hector Jirau, Managing Partner, Jirau Capital Management.

What is your outlook for investing in health care?

We find ourselves bullish towards the health care sector amidst current market conditions due to the COVID-19 pandemic. It is a great time for the right investments with many companies in the sector trading at or near cash. Nonetheless, we have to consider the fact that the sector is currently filled with numerous pre-clinical and early clinical-stage companies which ultimately increases risk exposure vis-à-vis the opportunities it presents. The excess of liquidity in this sector, as seen during the month of March, augments the possibility of mergers and acquisitions and stock buybacks in the near future. Considering  the global economic impact due to the exponential surge of COVID-19 and the geopolitical risk; this represents uncertainty when you take into consideration various factors: (i) the United States 2020 elections; (ii) mitigation efforts behind the Affordable Care Act; (iii) the current reform exposing providers with a hit on profitability considering the drug pricing discourse; and (iv) the federal stimulus package whose effect on the U.S. stock markets and the consumers is still questionable.

Nonetheless, the health care sector is recognized as a defensive sector and has shown to overperform during times of economic uncertainty. In these days where this uncertainty reigns, having exposure on the right investments in health care can bring relief to investors. The overall market is considerably volatile and still overvalued, but this has created a number of windows of opportunity in companies trading at tangible book values, including discounts of approximately 44% below February’s highs. Ultimately, it all relies on having the right skills and tools to identify and value those companies before investing. Accordingly, we remain bullish on health care despite our significant sector exposure based on the premise that the investments that we make carry our profound scientific and evidence-based due diligence.

What are the greatest opportunities and why?

With the current advancements and understanding of the basis of many diseases, the health care sector is currently full of opportunities. We are focusing our efforts on evaluating and testing companies in the rare diseases therapeutics niche. Approximately ten years ago, the investments industry looked at these pipelines as merely speculative due to the little understanding of the disease physiology, lack of technology available, and the vast research and development (R&D) platform costs behind them. Presently, we are single-handedly editing DNA with an extremely high degree of specificity and treating diseases with little secondary effects. There are many great companies with ongoing clinical trials on rare diseases that we understand will prevail and bring a viable treatment option for this underrepresented population.

If we were to choose exposure inside the sector, it would be in this niche. Valuations are currently at their lowest due to their speculative nature and aforementioned global crisis (COVID-19 pandemic). Thus, it is considerably easy to diversify with certain instruments, such as ETFs, that have exposure to gene therapy and an adequate risk-to-reward ratio based on our evaluation. Please note that an investor should make enough research to provide a thesis strong enough to support a potential investment. This sector requires a lot of studying and consciousness of the valuations and finances of the companies. Also, it is imperative to understand the science encompassing these platforms and the inherent risks behind each product. It wouldn’t suffice to say that a proper allocation should be the first item on the list before investing in this sector.

What are the biggest challenges and why?

We believe picking the right investment in the health care sector to be the greatest on-going challenge. Health care is no ordinary sector. It doesn’t matter how much number-crunching, understanding of the financials and valuation models you apply in this sector, it will not be enough. Being able to understand the science and technology behind the innovation and/or product in this sector is the up most important. Furthermore, it requires having hands-on exposure and years of research experience in order to have the necessary knowledge to make an accurate prediction. Risk management in health care is not an easy task either. Regular stock pickers usually have a hard time here no matter how seasoned they are in the investment management industry. The process of taking an innovative idea and transforming it into a successful treatment or therapy is cumbersome. Health care is a niche that requires the right expertise, experience, and in-depth understanding of the science to make a proper risk-adjusted prediction, and ultimately, a profit.

What keeps you up at night?

The extra 1% that could have been gained. Our quantitative approach is focused obsessively on risk management and optimizing our risk exposure. In a volatile and highly binary sector such as health care, this is the perfect tool to protect clients’ hard-earned money based on the only thing we as investors can control: the risk. Nonetheless, it comes with an opportunity cost: the extra 1% that could have been made. Most of my days revolve around optimizing our quantitative algorithms to further improve our risk mitigation without sacrificing returns. Yet, no matter how much you tweak the numbers, there is always that extra percent that will keep you up at night.