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A Revolutionary Change in Healthcare

Katie Rushkewicz Reichart, CFA

Katie Reichart: I'm Katie Reichart with Morningstar. I'm here at the Morningstar Investment Conference with Jean Hynes of Wellington Management. Jean runs Gold-rated Vanguard Healthcare and Bronze-rated Hartford Healthcare. Thanks for being here.

Jean Hynes: Glad to be here, Katie. Thank you.

Reichart: So, there's obviously a lot of innovation going on within healthcare. How has that manifested in your portfolio, and how do you distinguish winners from losers?

Hynes: There are three types of innovation happening in healthcare. We can talk about what's happening in the biopharma sector. I'll keep that for last. There's also a new product cycle going on in medical technology. Interestingly, there's also a lot of innovation happening in healthcare delivery.

I think the most important part of innovation in healthcare delivery is what's happening with data. Data has come into healthcare for the first time, and I think that will allow a lot of innovation in how payers and governments begin to incentivize healthcare delivery over the next decade. I think it will take time. It won't happen all at once, but the use of data and how to incent people--that will really help governments lower cost over the long term.

The other part of innovation is happening on the product side, both on biopharmaceutical product side and the medical-technology product side. On medical technology, we're in a normal new product cycle, where we have a number of new categories such as TAVR, for example, and diabetes sensors that are driving some of the large companies. 

When we think about what's happening in biopharmaceuticals, I think that's more revolutionary. We're in the very early stages of really changing and understanding science and understanding biological pathways, understanding what drives diseases. That will really change the standard of care over the next 25 years. We're in the very early stages of that, but that is more revolutionary and probably more exciting than in any other time in my over 25-year career looking at healthcare stocks.

Reichart: Are there areas within healthcare you're less optimistic on?

Hynes: I think any area in healthcare, when you think about what's going to happen, when I think about those three initiatives--we have to have funding. So healthcare dollars to pay for healthcare delivery and healthcare treatment are not ... they can't grow infinitely. And so when you think about "where's the dollars?"--I think the pie will grow, but the pie will not grow in all areas the same way. 

When I think about what areas will grow, I think drugs that change standard of care, new devices that change--that really improve--people's lives and have definitive data. And in other areas--when you think about the inputs to healthcare delivery--other areas will suffer. So if you really don't have a really differentiated way to treat a patient, you're going to be under a lot more pricing pressure in the future. There are definitely companies that don't have as robust of a pipeline to offset some of the challenges. For example, we're very early in the cycle of biosimilar competition that's coming to the U.S. and other parts of the world. Companies that don't have enough innovation to offset that will be under pressure. That would be one area. 

Then I think very broadly, and this is more less-defined, but as data identifies standards of care and best practice, parts of the healthcare system that are overused--and that can be very broad ... there are many different categories and that's something that we're going to be spending a lot of time on... What parts of healthcare are overused per capita because of the current incentive system? As incentive systems change, where will volumes begin to decline? I think that's not quite obvious yet, but I'm sure there are going to be areas that will be under pressure in the coming decade.

Reichart: Jean, thanks so much for being here.

Hynes: It's great to be here. Thank you.

Reichart: I'm Katie Reichart with Morningstar.