Matt Arens, president of Kopp Investment Advisors, also is senior portfolio manager of its AccruHealth small-capitalization fund, which has been a stellar performer in recent years, thanks to good-performing medical technology, drug and information-technology picks.
Lipper and Money Manager Review recently ranked AccruHealth the top performer among small-cap funds for the past three years. Arens, who has been following the health care industry since 1997, said he’s mindful of how the Affordable Care Act, also known as Obamacare, will change the health care business as it is fully rolled out next year.
Q: What has been the annualized return of AccruHealth over the past three years?
A: AccruHealth’s annualized return over the last three years was 26.3 percent, compared to 12.8 percent for the Russell 2000 Growth Index. Since its inception in September 2008, AccruHealth has annualized returns of 24.66 percent, compared to 8.26 percent for the Russell 2000 Growth Index.
Q: What have been two or three of the best performers and why?
A: One of the best performers is Cepheid [ticker: CPHD], which provides a test to quickly detect staph infections patients acquire during hospital stays. Under new health care reform policies, hospitals are no longer reimbursed for treating hospital-acquired infections and, in the near future, Medicare/Medicaid reimbursement for all of a hospital’s services will be cut by 1 percent if it falls into the “worst-performing quartile” in this area. These policies provide a huge incentive for hospitals to adopt Cepheid’s solution to reduce the frequency and spread of these types of infections.
Another “best performer” is Spectranetics Corp. [SPNC]. One of its core medical devices opens blocked arteries in legs, which helps reduce the frequency of debilitating and costly amputations.
Additionally, in the health care space, a typical path to success for a small company is to be acquired, locking in gains for stockholders. One of the biggest drivers behind AccruHealth’s performance has been the propensity for portfolio companies to be acquired for a significant premium — some as high as 170 percent. Fifteen portfolio companies have been acquired since AccruHealth’s inception 17 quarters ago, including local companies Medtox, ATS Medical and American Medical Systems.
Q: How many stocks in the portfolio?
A: There are generally 35 to 45 different stocks in the AccruHealth portfolio. Currently, there are 41 stocks in the portfolio.
Q: How have you positioned the portfolio for ongoing health care reform?
A: Whether it’s government efforts, such as the Affordable Care Act, or new policies implemented by insurance companies, the overall goal for the health care system is to provide better care. Health care providers are being [pushed] to deliver better outcomes at lower costs. Companies in the AccruHealth portfolio offer innovative solutions that help providers operate more effectively within this new environment. I look for small companies in the sweet spot of innovation — larger than start-ups ... but smaller than established industry titans. They are “hungry” companies that have the critical mass to reduce investment risk, combined with solid business models.
Q: Are there companies that actually address some of the cost drivers in the system?
A: Absolutely. Finding companies that mitigate health care costs is an important aspect of [our] approach. Examples include companies developing solutions such as medical devices that help reduce the length of hospital stays; diagnostics that better ensure expensive drugs are used only to treat patients that are likely to benefit from therapy; generic drugs that are less expensive versions of branded drugs, and health care information technologies that reduce billing-related costs while improving accuracy.
Q: Our health care system delivers the most expensive technology and treatments but similar or worse outcomes than other industrial countries that spend less on universal health care. Obamacare, if I understand it, expands access and also puts a bigger focus on prevention and primary care and reimbursing providers more for outcomes instead of every procedure and $30 for every aspirin, etc.
A: As a portfolio manager, I focus on the investment opportunities at hand, whether they are created by industry, regulatory or policy changes. What I can tell you is that the [Affordable Care Act] will drive more health care spending in the near term. The Centers for Medicare and Medicaid Services estimate national health expenditures have increased approximately 3.9 percent over the last five years; it expects that number to increase to 7.4 percent in 2014. The degree to which this “upfront” spending reduces costs down the road will determine whether the ACA is indeed a good thing.
Q: Is now a good time to invest in health care stocks?
A: The combination of the [Affordable Care Act] driving tens of millions of new consumers into the U.S. health care market, along with baby boomers entering their peak years of health care expenditures, should create a backdrop for significant growth in health care spending over the next several years.
In the near term, we’re looking at the vast majority of the [Affordable Care Act] being implemented by January 2014, with major implications for health care investing. The act is changing the rules of the game — more than anything in recent history — creating new winners and losers. Because stock prices typically reflect investors’ future expectations for a company, the time is now to identify stocks that will reap significant opportunities and those that will face considerable headwinds.