CEF Insights: The Future of Healthcare Investing

Transcript

CEFA:
Welcome to CEF Insights, your source for closed-end fund information and education, brought to you by the Closed-End Fund Association. Today we are joined by Jason Akus, Portfolio Manager and Head of Healthcare Investments with Aberdeen Investments. Aberdeen is the investment advisor for four closed-end funds primarily investing in healthcare: Aberdeen Healthcare Opportunities Fund, symbol THQ; Aberdeen World Healthcare Fund, symbol THW; Aberdeen Healthcare Investors Fund, symbol HQH; and Aberdeen Life Sciences Investors Fund, symbol HQL. We're happy to have you with us today, Jason.

Jason Akus:
Thanks for having me. I really appreciate you inviting me on.

CEFA:
Jason, I mentioned the four healthcare funds you manage. Two are more income-focused and two are more growth-oriented. Can you discuss how they each address different investor preferences while providing exposure to the healthcare sector?

Jason Akus:
Yeah, absolutely. So our four funds are designed to meet distinct investor needs while trying to leverage the healthcare sector's long-term potential. Starting with the income-focused funds, the Aberdeen Healthcare Opportunities Fund, ticker THQ, and the Aberdeen World Healthcare Fund, THW, aim to deliver a consistent yield with about a 50/50 split between growth and income.
THQ focuses on US-based healthcare companies using a combination of dividend-paying stocks, a covered call strategy, as well as a significant allocation to fixed-income bonds to generate monthly distributions. I think this appeals to investors seeking steady income with a lower volatility tolerance.
THW, which is kind of similar to THQ, however, it takes a global approach, investing in healthcare firms worldwide, and it adds diversification and taps into emerging market growth, also prioritizing income through dividends, options, and bonds. THW in its growth bucket also does make significant investments in emerging non-US biotech and biopharma opportunities that we think can provide long-term capital appreciation that may just be off the radar of US investors.
Now shifting to the growth side, the Aberdeen Healthcare Investors Fund, HQH, and the Aberdeen Life Sciences Investors Fund target capital appreciation. HQH invests broadly across all healthcare subsectors, biotech, pharma, MedTech, managed care, et cetera, really focusing on companies driving innovation, which is ideal for investors comfortable with higher risk potential and the potential for long-term capital gain.
Now, HQL is a little more specialized. It is heavily concentrated on life sciences, particularly early-stage biotech and therapeutics, which can offer a significant upside, but obviously with significant upside comes greater volatility and greater risk. All four funds provide healthcare exposure, but their structures align with different risk tolerances and objectives, THQ and THW for income and stability, and HQH and HQL for growth potential.
Now, by focusing on healthcare, we can tap into the sector's strong fundamentals, like aging populations, technological advancements, and we can ensure each fund meets our investors' goals while capturing the sector's opportunities.

CEFA:
What do you see as the primary tailwinds and risks for the healthcare sector?

Jason Akus:
Yeah. So it's not going to be, I think, a surprise to many of our listeners, but we think healthcare is well-positioned with several powerful tailwinds, and the first and foremost being the demographic trends being the major driver. Global populations are aging, they're aging here in the US. And like all developed markets, like the US and Europe, aging populations will demand more healthcare services, more pharmaceuticals, and more medical devices.
Second, technological innovation is accelerating. From gene therapies to wearable heart monitors, there are new markets being continuously created, opening up growth opportunities, and also, most importantly, improving patient outcomes.
And then the third tailwind is that healthcare spending continues to rise globally with governments and private sectors investing heavily, and especially in emerging markets where access to care is expanding. Now, those are the tailwinds, and of course there are a lot of notable risks, especially in 2025. Regulatory uncertainty is a big one. There's always these constant changes in drug pricing policies or approval processes, especially here in the US, which can impact profitability of these companies.
For an example, any aggressive push for price controls can squeeze margins for pharma firms. Supply chain disruptions, while less severe than during the pandemic, remain a concern, particularly for the medical device companies reliant on global manufacturing. Geopolitical tensions also pose risk, potentially affecting trade policies or access to critical materials like rare earths that are used extensively in diagnostics. Lastly, the biotech sector faces funding risks. While venture capital and IPO markets have improved, a tightening of monetary policy could limit capital for early-stage firms.
But despite these challenges, we believe healthcare's defensive characteristics and innovation-driven growth make it a compelling long-term investment, provided you're selective in your exposures and mindful of those risks.
Now, there are, of course, other risks that are a little more political in nature. The recent appointment of RFK Jr. and his views about healthcare have added some additional uncertainty. Even just yesterday, it was announced that Vinay Prasad would be taking over CBER. Now, that's the part of the FDA that oversees the regulatory approval of biologics. Dr. Prasad has expressed concerns about COVID vaccines, as well as accelerated drug approval processes in areas like targeted oncology.
These uncertainties about forward approval processes, needless to say, has created a lot of volatility in sectors like pre-commercial biotech, but we think eventually the volatility should die down and there'll be some interesting and attractive opportunities moving forward.

CEFA:
Jason, the Federal Reserve has held rates steady, the rate of inflation has improved, while the policies of the new administration have introduced some volatility to investment markets. Where do you see the healthcare sector currently, and what is your outlook for the rest of 2025?

Jason Akus:
Good question. I think healthcare is in a pretty strong position as we move through 2025, and that's largely due to its defensive nature. Unlike cyclical sectors, healthcare demand remains steady regardless of economic swings. People need medicines and treatments whether the markets are up or down.
Now, the Fed's decision to hold rates steady has created a favorable environment for healthcare companies, particularly those with stable cash flows, as borrowing costs remain manageable. Improved inflation also helps, easing pressure on input costs like raw materials for drug production. But there is hope that, at some point, if the economy does weaken, that the Fed may actually resume their rate cuts, which historically has been really good for cash-hungry, pre-revenue biotech companies.
Now, the new administration's policies have sparked volatility, as I was mentioning earlier, particularly around trade and regulatory expectations. For instance, as the government moves to streamline FDA approvals, this could benefit biotech and MedTech, but a renewed focus on drug pricing reforms might pressure large pharma.
So I think all in all, looking ahead, we're pretty optimistic on 2025 relative to other sectors in the economy. And biotech, after a few lean years, has actually started to see some renewed investor interest with valuations still reasonable compared to its historic highs. MedTech, especially robotics and diagnostics, is another bright spot driven by demand for minimally invasive procedures. And emerging markets and non-US developed markets offer growth opportunities as healthcare infrastructure expands. While policy is uncertain and we can have some short-term noise, we expect healthcare to outperform broader markets, given its resilience and exposure to secular trends, like the aging populations and technological advancements, but our focus is on companies with strong fundamentals and innovative pipelines to navigate any volatility.

CEFA:
Artificial intelligence is in its early stages, but has tremendous potential. How do you see AI impacting the healthcare sector?

Jason Akus:
AI is transforming healthcare in ways that are both exciting and profound. We're still in the very early innings, but one of the biggest impacts is going to be in drug discovery. AI platforms can analyze vast datasets to identify potential drug candidates, reducing development times and costs. For example, companies using machine learning to predict how molecules interact, potentially cutting years off traditional R&D timelines.
In diagnostics, AI is enhancing accuracy. Think about radiology where algorithms can spot anomalies in images faster and more reliably than human eyes in some cases. I think longer term, this will ultimately result in better patient outcomes and reducing healthcare system costs.
Personalized medicine is another area where AI shines. By analyzing genetic and clinical data, AI can help tailor treatments to individual patients, boosting efficacy.
Beyond clinical applications, AI is streamlining operations. Hospitals use it for scheduling, inventory management, predicting patient readmissions, which also lowers costs. But let me just caveat that investors need to be cautious. The AI healthcare space is crowded, and not every startup and application will succeed and be positive for these companies. But we look for companies with proven technology, strong partnerships, say, with major pharma or hospitals, and clear paths to revenues.
Regulatory hurdles are also a factor. AI-driven diagnostics or treatments need FDA approval, which can be a lengthy and unproven process at this point. But long-term AI will be a game-changer, and we're being selective, focusing on firms with scalable solutions and defensible intellectual property to ensure the capture value in this rapidly evolving space.

CEFA:
Jason, how do you evaluate if a new development in healthcare that may be a great stride in science can prove to be a profitable product or a line of business?

Jason Akus:
Yeah, evaluating a healthcare innovation's profitability is a complex but critical process. And here at Aberdeen, we use a disciplined framework. First, we assess the addressable market. A breakthrough might be scientifically impressive, but it has to serve a specific purpose or a certain patient population. And if this revenue potential is limited, we will just kind of move on. But we look for conditions with significant prevalence or high medical needs, like oncology or some of these rare diseases with no current treatments.
Second, we scrutinize the regulatory pathway. The FDA approval process can take years, so we evaluate clinical trial designs and data. Phase II and phase III results are key to gauge the likelihood of success and timeline to market.
And lastly, I don't think it's doing any different than investigating any other company, but we consider the competitive landscape. A great drug or device needs a moat, patents, first-mover advantage, or superior efficacy to fend off rivals. Reimbursement's another hurdle. We analyze whether payers like Medicare or private insurance will cover the product at a price that ensures profitability.
And another thing we've done here at Aberdeen is also focus on the quality of management. I think this is critical. A strong team with a track record of navigating regulatory and commercial challenges can make or break the company.
And we also, finally, model the financials: development costs, peak sales, potential margins. For example, a gene therapy might have a high upfront cost, but massive long-term value if it's a one-time cure.
So, by combining these factors, market size, regulatory odds, competition, reimbursement, management, and financials, and we ultimately aim to identify innovations that will not only advance science, but deliver strong returns for our funds' investors. And so it's all about balancing the promise of breakthroughs with the realities of commercialization.

CEFA:
What advantages do smaller healthcare companies have in developing innovative technologies and treatments?

Jason Akus:
Yeah, good question. So smaller healthcare companies, particularly in biotech and MedTech, have unique strengths that make them hotbeds for innovation.
First, they're agile. Unlike large pharma with layers and layers of bureaucracy, small firms can pivot quickly, whether it's refining a drug candidate or adapting the new trial data. The speed's critical in fast-moving fields like gene editing or immunotherapy.
And second, they often focus on niche markets, rare diseases, or specific cancers, while larger companies may not see immediate scale where unmet need creates high-value opportunities. These focused efforts can lead to breakthrough therapies with strong pricing power.
I think often overlooked, but smaller companies can also attract top talent passionate about specific challenges. Science and executives at startups are often driven by the mission to solve a particular problem, fostering a culture of innovation.
They also have an edge in risk-taking. Large firms prioritize safe bets to protect shareholder value, but smaller companies can pursue bold, high-risk, high-reward projects like novel modalities such as RNA based therapies.
And access to capital is improved too. Venture funding and strategic partnerships with big pharma provide resources without sacrificing control.
And finally, I think this is a very important point, that smaller firms are often acquisition targets, which aligns incentives. A successful phase II trial can lead to a buyout, rewarding innovation. That said, they do face significant challenges, limited resources, and those regulatory hurdles, but their ability to move fast, focus deeply, take calculated risk gives them a distinctive edge in driving the next wave of healthcare advancements. So we love investing in these companies when the science and financials align.

CEFA:
Do you expect M&A activity to increase and perhaps be a catalyst for performance in the sector?

Jason Akus:
Yeah. Well, I've been very bullish on M&A in healthcare for 2025, albeit not as much as I expected. And I think part of that has to do with the pending tariffs on the pharma sector, and I think that's making the large-cap pharma companies a little more conservative than what they have been historically. But regardless, large-cap pharma is facing patent cliffs, major drugs are losing exclusivity, and this is going to create urgency to replenish their pipelines. And acquiring smaller biotech firms with promising late-stage candidates is often faster and less risky than just doing internal R&D.
Second, cash reserves are fairly strong. Big pharma and MedTech firms have built substantial balance sheets, and with interest rates stabilizing, financing deals is more attractive. And then of course, valuations in biotech, I think, are reasonable, if not quite attractive after a tough 2022 to 2023, making it more of a buyer's market for innovative assets.
Now, from a sector perspective, M&A acts as a catalyst in a few ways. For smaller companies, an acquisition or partnership can unlock significant value, driving prices higher. For example, a biotech with a phase III oncology drug might see a 50% premium in its buyout. For larger firms, acquisitions enhance growth prospects, boosting investor confidence. And we're seeing interest in some sub-sectors like oncology, neurology, gene therapy, where innovation is accelerating, and hopefully some of the policy changes could also play a role. If the new administration streamlines regulations, it actually may encourage more deals. However, risks like antitrust scrutiny or overpaying for assets needs careful monitoring.
In our portfolios, we position for M&A by investing in high-quality, smaller firms with strong clinical data, and larger firms that can benefit from strategic acquisitions. So I think we do believe M&A will continue to drive our performance in healthcare and biotech, and I'm optimistic for the rest of 2025.

CEFA:
Where are you seeing the best opportunities to put new capital to work?

Jason Akus:
Right now, we're finding a lot of compelling opportunities across several healthcare subsectors. With our biotech focus, we think that really does remain a very attractive subsector with clinical pipelines that are advancing, particularly in the I&I space, gene therapy, neurology, rare diseases, companies developing targeted therapies for cancers, like for lung or pancreatic, are showing strong clinical results. And we see pretty decent upside potential there. Enterprise values across the sector is at multi-year lows, so I think there is a lot of upside if you're willing to take the risk and make the right investments.
MedTech is another focus, especially firms innovating in robotic surgery and diagnostic imaging. These technologies are gaining adoption as hospitals prioritize efficiency and patient outcomes. And so we're deploying capital selectively and focusing on companies with strong balance sheets, proven management, clear growth drivers, and valuations that have compelling upside.

CEFA:
Jason, how do you see an allocation to sector-specific income strategies, like THQ and THW, best positioned in an income-oriented investor's portfolio? And likewise, how do you see growth-oriented healthcare strategies, like HQH and HQL, best positioned in a diversified portfolio?

Jason Akus:
Yeah, good question. So for income-oriented investors, THQ and THW, I think, are really good core holdings for that purpose. They're focused on dividend-paying healthcare stocks. The overwrite option, call writing options, and the fixed-income bond portfolios provide consistent yields with expected lower volatility than the broader equities. I think they're more ideal for retirees or those that are seeking more stable cash flows, complementing fixed-income allocations while adding to healthcare's defensive growth.
Now, for growth-oriented investors, HQH and HQL offer exposure to healthcare's innovative engine in biotech, life sciences, and MedTech. They're probably best as a satellite holding in a diversified portfolio, adding high-growth potential alongside with core equity or index funds.
But I think both pairs leverage healthcare's resilience with THQ and THW private portion income, and HQH and HQL targeting capital appreciation, balancing the reward and risk in different portfolio contexts. I hope that helps clear that up.

CEFA:
Jason, thank you so much for taking the time to join us today.

Jason Akus:
Thank you for having me. It's been a pleasure and thank you.

CEFA:
And we want to thank you for tuning into another CEF Insights podcast. For more educational content, please visit our website at www.CEFA.com.

Podcast recorded May 2025.

Disclosure
This material is not and is not intended as investment advice, an indication of training intent or holdings or the prediction of investment performance. All fund-specific information is the latest publicly available information. All other information is current as of the date of this presentation. All opinions and forward-looking statements are subject to change at any time.
Aberdeen Investments disclaims any responsibility to update such views and/or information. This information is deemed to be from reliable sources; however, Aberdeen does not warrant its completeness or accuracy. This presentation is not intended to, and does not constitute an offer or solicitation to sell or a solicitation of an offer to buy any security, product, investment advice or service (nor shall any security, product, investment advice or service be offered or sold) in any jurisdiction in which Aberdeen is not licensed to conduct business, and/or an offer, solicitation, purchase or a sale would be unavailable or unlawful.