Bill Aulwes: Welcome to Always Savvy with Bill Aulwes. I'm a financial advisor at UBS in Phoenix, Arizona. This podcast is your guide for meaningful conversations, with leaders across a variety of industries. The format is simple, our goal is getting you the most interesting information in just a few minutes. We keep it short, but still want you to be savvy.
Well, welcome back to Always Savvy. I'm joined today by Eric Potoker. Thank you for being here.
Eric Potoker: My pleasure.
Bill Aulwes: Eric is an equity strategist, following healthcare, and let's just jump right in. So why has healthcare sector underperformed the broader market for the last three years? And what could cause it to outperform in the future?
Eric Potoker: Sure. Yeah, that's a question I often get. I think the main reasons are, one, where healthcare fits within most investors' view of the cyclical economy. And when you have a strong cyclical economy, defensive sectors like healthcare tend to underperform, and certainly when you have very strong pro-cyclical trends, things like the force that AI is in terms of the economy, in terms of stocks, that's also going to impact healthcare. And I think we do believe that healthcare is going to benefit ultimately from AI, but we're not seeing in the initial phases of AI being implemented in healthcare. We're not seeing that result in meaningfully faster growth, or greater profitability. Ultimately, we think it will drive some incremental growth and more efficiency, which will drive margins, but that's probably going to take a few years to play out in healthcare.
More recently, I'd say going back to maybe 14 months ago, the usual election cycle kicked in, and that's... Just generally, investors start worrying about elections, usually presidential elections, because of what that could portend for shifts in healthcare policy. And last year, saw that dynamic play out. And then post-election, usually healthcare does well when there's a Republican administration, they just tend not to be as focused on healthcare policy as Democrats. This time, however, particularly with the appointment of Robert F. Kennedy Jr. as Health and Human Service Secretary, that scared a lot of investors about healthcare.
And then that followed up... Oh, well, I'll step back one second. We actually upgraded healthcare in January, in part because we thought the market was overreacting to fears about policy changes in healthcare. And that worked for a couple of months, until President Trump really started focusing on healthcare, which frankly I did not expect. The two areas of focus were first tariffs, which was really economy-wide, but it seemed to have an impact on pharmaceuticals in particular, and that impact was after the market came to grips with the impact of tariffs on the rest of the economy. So it lingered as an overhang for healthcare, pharma in particular.
And then more importantly, Most-Favored-Nation pricing. And that is something President Trump tried in his first term, failed, but then has come back to in his second term, and really has spent a lot of time focusing on issue, and frankly, I think it is an issue that he sincerely cares about. And the fear is that if pricing in the United States were to be lowered to European levels, that that would have a dramatic impact on profitability.
Now, we continue to think, and I think recent events are starting to bear that out, that, again, that is the fear that's discounted into healthcare stocks and pharmaceutical stocks in particular, frankly is just far worse than anything that's likely to come of it. For a variety of reasons, the details of which are probably too many, and would take too long to go through. But ultimately, we just don't think that the president or Congress really has the appetite to dramatically change pharmaceutical pricing. And I think with some of the recent agreements between Pfizer and the administration, and a couple of other pharmaceutical companies with more to follow, we think, that's starting to lay the framework and provide the clarification, I think investors need to realize that the worst case is probably off the table. Sentiment valuation should improve going forward.
Bill Aulwes: Okay. Great. So within healthcare then, where are you seeing opportunities?
Eric Potoker: Yeah, I'd say selectively within the pharmaceutical sector, there are haves and there are have-nots. There are a number of companies that are facing significant products that are losing patent protection, and thus losing revenue, and that then becomes a significant drag. And investors have seen that with pharmaceutical companies for decades. But we think there are a handful of pharma companies that are through those patent cycles, and are now starting to grow meaningfully. And we think some of that's really driven by some innovation, I'd say incremental innovation, but still innovation, new product growth in some key therapeutic areas like diabetes and obesity, neuropsychology, and immunology and inflammation, which are large areas, but still have a lot of growth potential. And we see a number of pharmaceutical companies who think benefit from growth in those areas, and then you see accelerating revenue and earnings growth over the next 2 to 3 years.
Beyond pharma, we still like the medical device sector, because the underlying end markets there are very strong, and there's a durability to those end markets. And again, new product cycles helping to drive growth for a select number of medical device companies. But an overall market that just continues to grow, in part because of demographics, and as I said, in part because of innovation. And then also, we like the life sciences tools segment. So think about those companies, they're the ones that are supplying materials into the research and development infrastructure for biopharma, and that's supplying directly to biopharma companies, also supplying them to academia, to government. Those latter two are struggling somewhat, because of the dynamics right now with this administration, and spending in the National Institutes of Health. But the pharmaceutical industry, we think, in part because we think the fears are overdone, will continue to spend on research and development.
It has to in order to continue to grow, it has to make up for the products that lose patent protection, and then it has to buy the supplies from the life sciences tools companies, and that we think have been caught up in the overall fear that has depressed the sector. We think, as I said before, that fear likely subsides as we ran out of the initial phases of a clarification. That should ultimately help both the suppliers and the companies actually do the research and development, the pharma companies.
Bill Aulwes: Okay. So to wrap us up, long-term, what are the risks and the opportunity for the healthcare sector? And in particular the longevity-
Eric Potoker: Yeah. Good question, Bill. And those are tied together in a lot of ways. The opportunity is both the demographic drivers, and the innovation that comes with healthcare. And the pressure on the other side of it is the cost, who ultimately is going to pay for all of that innovation, for all of us as we age and want to continue aging longer and longer into triple digits? Who's paying for that? In most societies, that's some combination of the government. In the United States, employers, and then consumers themselves. And all of those budgets are under pressure.
So there's a rationing dynamic that's been taking place for decades, more, but that's going to continue to have pressure on it, and that will pressure what's spent on healthcare, and that will pressure the choices ultimately that payers, governments, employers, and people make. And that's the tension. But I also think that's the opportunity, really, and is a lot of the underlying force behind our longevity trio, which is, we think the companies that are providing that innovation, they're really making a difference in therapeutic areas where there's unmet need, underserved populations. We think those are the areas where government is going to pay, where employers will pay for the healthcare of their employees, and frankly, where consumers will pay.
One of the case studies that I think about, if you think about obesity drugs, and right now they could cost a consumer who doesn't have insurance, so they're just buying it on the market, assuming they're buying a branded product, one of the two that are out there, they're spending about $6,000 a year. Now, we think that price is going to come down over time, and we think that's fine for the growth of that market. But if you think about that the average person spends $20 a day on food, these drugs in general reduce chloral consumption by 30%. So if you think of that potentially being a $6 reduction per day in someone's food consumption, and you roll that out over the course of the year, that's about $2,100 of savings in food consumption that someone would get using these drugs.
Now, you think by the added health benefits of losing weight, lowering your blood sugar, reducing your risk of a major cardiac event, lots of other downstream health consequences from being overweight, and there's additional value beyond just the cost of the food that you're no longer consuming. So we think there's a case to be made just at the consumer level, at a very simple level, for pricing that remains in the low, maybe up to mid-thousands of dollars for a pretty long period of time, and that creates a large market. But that's the consumer, and then ultimately, it's also employers and government thinking about that cost-benefit equation. And we think those are the kinds of things that are going to drive, again, the companies that are providing those solutions, those products, those therapies that are going to address those conditions, which in the case of diabetes and obesity, have both been underserved conditions therapeutically and medically.
Bill Aulwes: Yeah. Absolutely. Great summary of this part of the industry. I appreciate you being here.
Eric Potoker: Thank you, bill. Thank you for having me.
Bill Aulwes: My name is Bill Aulwes. Feel free to reach out with any questions about your financial needs. You can reach me at william.aulwes@ubs.com. Aulwes is spelled A-U-L-W-E-S as in Sam. Have a great day.
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