Is it a good moment to invest in healthcare? What opportunities are available for investors within this sector? The increasing life expectancy and the medical tech growing industry, have created good opportunities for investors who see this sector as an interesting option to look at. The swift development of the Covid vaccine has also created new opportunities for other parts of the healthcare industry, such us the development of new technology or the creation and improvement of Apps for primary attention.
We have asked the portfolio managers of Bellevue Funds (Lux) BB Adamant Medtech & Services, AB – International Health Care Portfolio, Janus Henderson Capital Funds plc – Global Life Sciences Fund and Polar Capital Funds PLC – Polar Capital Healthcare Opportunities Fund to take us through their strategies and to give us some insights from the sector, so we can understand if it is, indeed, a good moment to invest in healthcare.
Source: Morningstar, Total returns 5 years annualised. Bellevue and Polar (03/09/2021) – AllianceBernstein and Janus Henderson (07/09/2021).
Bellevue Funds (Lux) BB Adamant Medtech & Services
Marcel Fritsch, Portfolio Manager Bellevue Funds (Lux) BB Adamant Medtech & Services
Mega trends such as increasing life expectancy, changing lifestyles and the growing prevalence of chronic diseases make the healthcare industry an attractive growth market. Our investment universe is the entire healthcare market excluding the drug developers, which corresponds to about 10% of global GDP.
In the Medtech segment, sales and profits are growing at above-average rates vs the broad market, fueled by high rates of innovation in the fields of diabetes treatment, minimally invasive heart valve therapies and surgical robotics. In healthcare services, we think US health insurers are attractive as the number of insured is growing. Moreover, “Digital Health” companies are delivering added clinical value, not to mention urgently needed efficiency gains and cost savings.
The Medtech & Services sector is one of the stock market’s most defensive sectors with sustainable outperformance potential and that is one reason for the success of our investment strategy. This and the additional growth from non-emergency treatments that had to be postponed during the pandemic create attractive entry points for investors. The generally very good Q2 results reported by medical technology companies confirm our investment case, which assumes that the high backlog of postponed surgical procedures will continue to subside to more normal levels during the course of 2021, leading to a normalization of demand for Medtech products and healthcare services as well.
The award-winning BB Adamant Medtech & Services Fund offers investors well-diversified access to the promising Medtech & Services sector. As a fully adequate healthcare investment vehicle, the fund aims to generate a significantly higher return than a traditional healthcare fund but with a comparable risk profile. We focus on profitable, liquid mid and large cap companies with an established product portfolio as well as fast growing small cap companies with leading-edge technology offering. Stock selection is based on fundamental company analysis, focusing in particular on the medical benefits and the potential savings for the healthcare system as well as the expected market potential of a company’s products and services. The selection of the portfolio companies is entirely bottom up, independent of benchmark weightings. The Fund takes ESG factors into consideration while implementing the aforementioned investment objectives.
AB – International Health Care Portfolio
Vinay Thapar, Portfolio Manager – International Healthcare Portfolio, AllianceBernstein (AB)
How has the development of COVID-19 vaccines changed the healthcare industry? Historic efforts to develop COVID-19 vaccines have had two huge effects on the industry. First, the success of mRNA technology has added an important weapon to drugmakers’ arsenals. We’ve learned from the pandemic that this new technology can be scaled up quickly to deliver a highly efficacious vaccine. Second, drug development has accelerated
Does an ESG focus identify unique risks or opportunities for healthcare companies?Integrating environmental, social and governance (ESG) factors in an analysis of healthcare companies is becoming increasingly important for equity investors. Since healthcare is an industry that has a profound impact on society, there’s a growing focus on the value of care provided for patients and communities. We believe companies that improve the value of care delivered make a positive impact on the healthcare system, which positions them well for growth in an era of rising healthcare costs and increased government involvement.The value of care can be improved by decreasing the cost of service, increasing the benefit to patients or both. Engaging with companies to increase the value delivered to patients is an effective ESG framework for investing in the healthcare sector, in our view. For example, by focusing on value-based outcomes, UnitedHealthcare has shortened the length of hospital stays per case by 40% and lowered the mortality rate for patients with congenital heart disease by 41%. Patients who have used the company’s cost and wellness transparency resources have paid nearly 30% less than patients who did not.
What are the latest trends in healthcare that deserve investor attention? Diagnostics is an exciting segment of the industry. The pandemic taught us the hard way that a more sophisticated testing infrastructure could have helped prevent the spread of COVID-19. So, there will be increased efforts—particularly by governments—to develop preventative diagnostics capabilities. Efforts to bring medical care closer to the home are growing. The more you can keep people out of the hospital and intervene earlier, the better it is for the patient and for society.Data analytics, too, are becoming more commonplace to improve outcomes in innovative ways. These trends are creating fertile ground for equity investors. But don’t be blinded by science; exciting drugs in development and new technologies on their own aren’t good guides to investing success, in our view. Focusing on business fundamentals is the best way to find innovative healthcare companies that are well positioned to deliver long-term returns to equity investors in a rapidly evolving post-pandemic world.
Janus Henderson Capital Funds plc – Global Life Sciences Fund
Andy Acker, Portfolio Manager at Janus Henderson Capital Funds plc – Global Life Sciences Fund
The health care sector is experiencing a period of innovation unlike anything we’ve seen before, driven in large part by dramatic improvements in our understanding of genetics and the mechanisms of disease. In the Janus Henderson Global Life Sciences Fund, we try to capitalize on this innovation by focusing on companies developing treatments we believe can change the standard of care for patients. In our view, these firms stand the best chance of earning regulatory approval and attractive reimbursement rates, both of which are key to future earnings growth.
Some drugs now in development were once the stuff of science fiction. One of the most exciting advances, in our view, is in-vivo gene editing, a process by which researchers attempt to change a specific gene from within a person, knocking out harmful proteins that cause disease. Recently, clinical studies showed one gene-editing therapy reduced a harmful protein by an average of 87% with a single low-dose infusion. The cardiac form of this disease, TTR amyloidosis, affects hundreds of thousands of patients and leads to a median expected survival of only 3-5 years. Although the data are still early and longer-term follow-up will be necessary, we see this as a watershed moment for the sector with significant market potential.
Gene editing is just one example of health care’s innovation. Advances are also occurring in cancer screening, precision oncology and engineered monoclonal antibodies, which can act as precision-guided missiles to directly deliver chemotherapy to targeted cancer cells. In health care services, new value-based models are emerging that can provide patients with better service at lower costs. And in medical technology, we continue to see advances in terms of diagnostic treatments. For example, diabetics can now monitor their glucose levels on a smartphone every five minutes without the need for multiple finger sticks each day.
Even as health care continues to innovate, the sector has lagged the broader equity market for much of 2021. Concerns about drug pricing in the U.S., uncertainty around the delta variant of Covid-19 and the market’s cyclical rebound earlier in the year have all contributed to the underperformance. We believe these concerns are largely short term in nature. In the meantime, the sector now trades at one of the lowest valuations we’ve seen relative to the broader market in 20 years. As such, we are overweight small- and mid-cap biotech stocks, which we believe are driving the sector’s most exciting innovation. We are also diversified across health care’s major industries, and by market capitalization and geography. Finally, we have the ability to invest a small percentage of the portfolio in private companies, before they access the public markets. These firms are often in the early stages of drug development but can attract significant investor interest through initial public offerings and subsequent financings. In our view, a combination of low valuations, ongoing innovation and growing demand for advanced health care globally makes the sector a highly attractive place to invest.
Polar Capital Funds PLC – Polar Capital Healthcare Opportunities Fund
Gareth Powell, Co-head of Healthcare, Polar Capital
The Polar Capital Healthcare Opportunities Fund aims to provide investors with long-term growth opportunities by investing globally in companies across the healthcare sector. The Fund is a multi-cap portfolio that combines the long-term upside potential of small-cap stocks, but whose risk and volatility are high, with mid and large-cap stocks that have greater liquidity but with anomalies in valuation that tend to be shorter duration. The team’s objective is to deliver superior risk-adjusted returns compared to the healthcare index, the MSCI AC World Daily TR Net Health Care Index
With a relatively concentrated portfolio that is typically around 40-45 stocks, the team’s current focus is on six major opportunities: the operating leverage impact of new products can be underestimated and drive outperformance; a longer investment horizon to exploit the time/value proposition of healthcare; specialist or niche markets are regularly overlooked by investors; M&A activity is often under-rated by the market; new technologies that can generate significant investor returns; and, geographical and sector anomalies in valuation.
For instance, healthcare has the scope for a great deal of improvement when it comes to adopting new technologies. Our thesis over the next 5-10 years is technology will need to have a positive impact to allow healthcare to become much more cost efficient and productive. With the pandemic, technology has come to the fore – video calls with a GP is one good example – though the sector has a way to go to catch up with the pace of change elsewhere. However, it should be a powerful force for healthcare in the future.
COVID-19 has obviously had an impact on all of us, at work and at home, and across multiple industries, none more so than in healthcare. The Delta variant of COVID-19 is now making life challenging across the globe but the results of the vaccination rollout in terms of reducing the numbers of hospitalisations and deaths is positive. Breakthrough cases are occurring in vaccinated patients, but this is to be expected due to the characteristics of this variant and that the efficacy of these vaccines is not 100%. Recent data is also suggesting that boosters may be necessary, but again this not unusual as vaccines against other viruses often require a booster as part of a three-dose regimen. What remains crucial in fighting the pandemic is that vaccination rates continue to increase to as high a level as possible.
With Joe Biden’s administration in the US, we assumed we would see an increase in regulation and drug pricing, the latter of which could have an impact on the pharmaceutical and biotechnology sectors. It is now one-year old, and we have been broadly surprised by the lack of activity in either, though we are still very mindful that there could be changes ahead in both.
Elsewhere, the top-down outlook is supportive of healthcare outperformance with large caps and higher quality companies likely remaining the favourites. Valuations remain favourable and we see areas such as small caps and biotech as more attractive now from a contrarian point of view, although we are taking a patient approach at this time.
Overall, we remain bullish on the opportunities ahead for the industry and for investors.
If you want to learn about other investment opportunities, check our insights section