Rendezvous with the Mirova Sustainable Equity Team

Hi everyone, I’m Laura Fauveau, and I’m on the sustainable equities team at Mirova. Today we’ll talk about US pharma, you might have noticed that the healthcare sector hasn’t been a star performer since the start of the year. Why is that? A big part of this story involves uncertainty around drug pricing and potential tariffs headwinds. We actually like the sector from here. Why? Because fundamentally, nothing’s really changed. The strong structural drivers are still there, and after the recent underperformance, valuations look historically attractive. Let’s check out some very recent headlines: just days ago, we saw a headline-grabbing deal between the Trump administration and Pfizer. The buzz was about lowering US drug prices, to match the lowest price paid by other developed nations, the so called “most favoured nations price”, the MFN. This MFN price will mainly be implemented through state Medicaid programs, which is good news for patients but remember, Medicaid is just around 5% of revenues, on average for pharma companies.

So what’s the pay off for Pfizer? As part of this agreement, Pfizer secured a 3 year grace period on tariffs, tied to investing in US manufacturing. Net-net we believe these policies are likely to translate into limited financial impact. On the day of the agreement, the healthcare sector was a massive outperformer. The market’s breathing a sigh of relief. And we expect a continued re-rating of pharma and life science tools. Why? The MFN impacts may be more manageable than feared. Short term, volatility is real, but zoom out, as healthcare is a major global trend. Aging populations, chronic diseases and innovation drive growth. The long-term outlook for pharmaceuticals is still compelling.

That is all for today, stay tuned for another episode of Rendezvous.

Welcome to another episode of Rendez-vous with the Sustainable Equities Team. I'm Joe Toscano, an equity analyst on the team. And I'm Shawn Kumar, an equity analyst on the team. Today we're going to talk to you about data centers. Joe will kick us off.

Now that most of Q2 earnings season is behind us, we can review how the data center market is looking going into the second half. Upon review of trends leaving Q2, it is clear that AI infrastructure spending is not slowing down. And what is driving this growth in data center builds is the mega trend of generative AI throughout 2025. Hyperscaler and AI CapEx expectations have grown considerably. Starting before Q1 CapEx expectations from the five biggest AI spenders was expected to be around 340 billion. Coming out of Q1, this was up to 360 billion. And now exiting Q2, we are at 420 billion in total CapEx spend for 2025. There's been a lot of concerns regarding the return generated from the large CapEx outlays. We're looking at how these five performed revenue beat consensus expectations by an average of 3.5% across these names and earnings was ahead by almost 12%.

It's not all AI, but is helped by AI tailwinds while GPU chips get a lot of headlines. When it comes to AI, there are many components that are involved in building out data centers on the server side. In addition to GPUs and accelerated chips, there are CPUs, storage, memory, and network interface cards. The networking side includes switches that connect servers and racks, and a leaf spine architecture and routers to connect different networks together along with things like firewalls and load balancers to manage the data. Lastly, optical includes different types of copper and fiber optic cables for data transmission compute, fabric interconnect ties GPUs together within the server, and there's also rack direct cable connections and large data center interconnect as well. In addition to the digital side, there's a large billet of gray space to go with it, which you'll hear more about from Shawn.

Joe discussed the digital side inside a data center referred to as the white space and mentioned the gray space. The white space contains a lot of the areas that we have covered, including semiconductors, server hardware, and networking equipment. The gray space broadly covers the infrastructure it needed to run a data center, including the electrical cooling and ventilation and building operation equipment outside of the building. The value chain includes companies providing construction and engineering services, real estate, and critically the energy supply to meet the growing power needs of these data centers. Now, this supply can come from a variety of sources, including renewables, and there's typically a need for short-term backup power as well. Now, it's worth noting that while the size of the addressable market for the white space equipment such as the semiconductors is substantially larger, the infrastructure found in the gray space and outside of the building is just as critical for the rollout of these data centers more broadly. And as the technology evolves and generative AI gets more sophisticated, there's a greater and greater need for equipment focused on power management and for advanced cooling technologies that can handle the higher level of heat generation coming from these semiconductors. And lastly, securing the energy supply for a data center is often the bottleneck for expansion that many of the providers face.

Well, we hope you found this to be helpful, and thank you for joining us today.

Hello everyone.

Welcome to another episode of Rendez-vous with the Sustainable Equity team.

I'm Hua Cheng, a portfolio manager on the team. As earnings season begins, we're starting to see results come in. One sector that we have been analyzing very closely is healthcare. Despite its recent underperformance, as long-term investors, we continue to see strong opportunities driven by significant demographic and lifestyle shifts. We expect structurally higher healthcare spending in the long term. Just this week, we heard quarterly results from two large life science companies, and we would like to share a quick update on the result and also discuss the current environment. Life science business has several headwinds. One of them is the weaker demand of bioprocessing business after COVID. Second one is a challenging situation in China, partly because of the local funding, partly because of tariff. Third one is uncertainties with the US, such as the President Trump's executive order on most favored nations pricings, tariffs, etc.

While all these factors are beyond our control, as portfolio manager, we focus on how individual companies navigate all these challenges.

Back to the quarter results. This week, we believe that the overall outcome are positive. We continue to see the gradual improvement from the bioprocessing business. Demand situation in China is challenging but better than initially expected. The uncertainty on tariffs remains, but here again, its influence on individual concrete result is also less significant than initially expected. And more importantly, we believe that these companies navigate all these unusual challenges very well. We believe their fundamentals remain very strong. The long term opportunities within the healthcare sector remain in place. We continue to favor these high-quality life science companies, not only because of their broad exposure to healthcare spending, but also because of their execution skills.

Thank you for tuning in to this episode. Keep an eye out for more update from the team as earning season continues.