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Health Care Sector Spotlight: Obesity


Artisan's Approach to Biotechnology and Pharmaceutical Investing


Health care has always been an important area of opportunity for the investment team. Within the sector, they tend to find the pharmaceutical and biotechnology industries particularly interesting given the continuous innovation. However, investing in these new innovative therapies can be risky with binary outcomes driven by clinical trial results and Federal Drug Administration (FDA) approvals. This necessitates a disciplined and selective process.


To the investment team, being selective means looking for companies with: 1) a de-risked asset, in other words, a drug that is already FDA approved or they have confidence it will be approved; 2) a multi-drug pipeline building upon an approved asset or platform technology; and 3) a balance sheet allowing the company to navigate the tricky drug approval environment. There are over 350 public pharmaceutical and biotechnology companies within the Russell 3000 and MSCI All Country World ex USA indices, yet the investment team only own 15 companies across Artisan's four portfolios as of 3/31/2023.


The Obesity Epidemic and Emergence of GLP-1 Treatments


One of the exciting areas the investment team has been researching is the emergence of obesity therapies. The global obesity epidemic is worsening. For example, 40% of Americans have a body mass index of 30 or above, due to factors including poor diet, lack of physical activity and sedentary lifestyles. The Centers for Disease Control and Prevention estimates obesity led to medical costs of $173bn in 2019 given its link to multiple physical and mental health issues, including high blood pressure, diabetes, heart disease, stroke, depression and anxiety disorders.


While other industries have capitalized on the obesity opportunity through products and services promoting healthier lifestyles, such as low-calorie food products and fitness trackers, the biotechnology and pharmaceutical industries have also recognized the potential. In recent years, the introduction of Glucagon-like peptide 1 (GLP-1) treatments has been gaining momentum. GLP-1 is an incretin hormone that helps regulate glucose levels and slows food absorption into the bloodstream. It is a potential therapeutic option for those with weight issues as these drugs allow people to feel full quicker and eat fewer calories without feeling hungry.


While challenges must be overcome before these medications become more widely available on the market—including logistical issues—their efficacy when taken correctly has been proven to lead to weight loss of 15%-20%. In comparison, bariatric surgery, which can lead to ~30% weight loss, requires an invasive procedure that is unappealing to many Prescription volumes for top GLP-1 therapies have been ramping up in recent years, and there are estimates that this category could reach $50bn in annual sales by 2030, versus $2bn in 2021. The competitive landscape for GLP-1 treatments is intensifying, but the investment team believe Novo Nordisk, a CropSM position within the investment teams Global Opportunities Strategy, is best positioned with multiple leading therapies: Ozempic, Saxenda and Wegovy.



Other Companies Exposed to This Secular Driver

The investment team are always interested in the broader supply chain implications from big new secular trends. In the case of new obesity therapies, the investment team believe they will create major opportunities for certain biomanufacturing suppliers. These drugs are administered as weekly injections done by the patient at home using “pen” devices common to insulin therapy. The investment team believe the growth of this category represents an excellent opportunity for the companies who supply these pens, and Artisan own two of them: West Pharmaceutical Services and Gerresheimer.


Both companies are adding manufacturing capacity to support future obesity drug volumes, and Artisan's research indicates these suppliers are securing attractive terms with pharmaceutical companies worried about keeping up with future demand.


The investment team are excited about both the potential volume growth and the margin expansion opportunity. For example, approximately 80% of West’s volumes are basic components that cost a few pennies and carry ~25% gross margins, while the other 20% of its volumes are from higher-value parts. These higher-value components are made of better-quality materials, may be pre-sterilized so they arrive at the customer’s manufacturing line ready to be used, and may also be inspected by machine vision cameras to avoid defects. These types of components are in demand from biotech and pharma companies that are launching new high-value biologic drugs (such as GLP-1s) to ensure there aren’t any packaging or storage problems. As a result, West can charge 50 cents or more and earn ~60% gross margins. The mix shift toward higher priced, higher margin products—a strategy also being pursued on the glass components side by Gerreshiemer—is what makes the company such a compelling long-term investment. The investment team think the volume potential of obesity drugs should accelerate that trend.


The growth of the GLP-1 market also further strengthens the already attractive long-term outlook for bioprocessing companies who provide products and services to help pharmaceutical companies produce and refine complex injectable therapies, such as biologics and peptides. While the hangover from the COVID-19 vaccine boom-bust cycle is making 2023 challenging for bioprocessing companies such as Danaher, Repligen and Lonza, the investment team expect a return to strong growth in 2024 for these franchises driven by innovative injectable therapies.





Investment Process Highlights


The investment team seek to invest in companies with franchise characteristics that are benefiting from an accelerating profit cycle and are trading at a discount to private market value.


Security Selection

The investment team seek to identify companies with franchise characteristics that are selling at attractive valuations and are benefiting from an accelerating profit cycle. The investment team look for companies that are well positioned for long-term growth, driven by demand for their products and services, at an early enough stage in their profit cycle to benefit from the increased cash flows produced by the emerging profit cycle.


Capital Allocation

Based on the investment teams fundamental analysis of a company’s profit cycle, the investment team divide the portfolio into three parts. GardenSM investments are small positions in the early part of their profit cycle that will warrant a more sizeable allocation once their profit cycle accelerates. CropSM investments are positions that are being increased to a full weight because they are moving through the strongest part of their profit cycle. HarvestSM investments are positions that are being reduced as they near Artisan's estimate of full valuation or their profit cycle begins to decelerate. The investment team believe that adhering to this process increases the likelihood of delivering upside participation with downside protection.


Broad Knowledge

The investment team overlay security selection and capital allocation with the capability to invest opportunistically across the entire global equity spectrum. It is the investment teams goal to have broad knowledge of the global economy to ensure that the investment team are able to find growth wherever it occurs. This capability extends from the design of Artisan's team, which leverages the broad experience of the portfolio managers and the deep expertise of the analysts on the team.


Team Overview


The investment team believe deep industry expertise, broad investment knowledge, a highly collaborative decision-making process and individual accountability are a powerful combination. Since inception, Artisan have been committed to building a team of growth investors that retains these attributes and is solely dedicated to there process and approach.


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