InvestmentsOct 7 2021

Investing in the next generation of healthcare opportunities

Supported by
Rathbones
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Supported by
Rathbones
Investing in the next generation of healthcare opportunities
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Healthcare is starting to catch up with the rest of the world, says Henk Grootveld, head of trends investing at Lombard Odier. 

He says that while digitalisation as a trend has been upending most sectors of the economy and society over the past decade, healthcare as a sector remained untouched by the advances in technology. 

Grootveld notes many healthcare systems “were still reliant on fax machines”, but that amid the Covid-19 pandemic “hospitals, with their backs to the wall, began to talk to each other and now we see rapid growth in terms of online consultation and online pharmacy."

He adds: "As a result of Covid, patients were sent home and monitored, rather than kept in hospital. We saw two decades worth of the change that happened in other industries happen in a few months in healthcare.”

Will McIntosh-Whyte, multi-asset investor at Rathbones, says: “The key benefit of the new technology is that it can process data much more quickly, and so can weed out the unsuccessful drugs at an earlier stage, which makes the whole process more efficient. In terms of the larger pharmaceutical companies, one of the advantages of the current market is they can enter joint ventures with smaller companies, which allows them to spread the costs.” 

In terms of what this means for investors, Grootveld says “healthcare now is like where e-commerce was at the end of the 1990s, and the investment opportunity may be in some of the software companies, and the online pharmacies, but we tend to take the basket approach: buying a number of the firms".

Grootveld adds: "The growth opportunity is huge, with ageing populations around the world and healthcare providers looking for ways to manage costs.”

Bryn Jones, head of fixed income at Rathbones, says environmental, social and governance investors are presented with a challenge when looking at healthcare companies because, while the work of producing medicines is obviously ESG-compliant, many such companies also engage in practices such as animal testing, which mean they need to be excluded from such funds. 

Innovation

Michael Schroeter, co-head of sustainable healthcare equity investing at HSBC Asset Management, says innovation generally happens in an S shape, with initial progress later becoming the norm, until new innovations take its place.

He says in the healthcare sector, the latest innovations involve the use of artificial intelligence and machine learning to faster process medical data and understand the patient’s issues in a more personalised way than is typically the case.  

Schroeter says the earlier stages of the of the healthcare innovation cycle included areas such as oncology and antibodies, which he says “now look expensive” as investments and have been replaced by AI and by telemedicine, and because he feels those areas remain at the start of their respective cycles, he feels there continues to be value in shares in those sorts of companies. 

He adds that, just as with the e-commerce companies of the late 1990s, “we are at the stage where we know they are going to get market share, but we do not yet know which of the companies will be the winners, so the best approach is to buy a basket of them, to invest in a thematic way.”

He says that a by-product of the recent boom in equity markets has been that many more biotech companies have listed on stock markets via initial public offerings, with the result that there is a broader range of shares in which to invest and less chance of a bubble developing. 

Ailsa Craig, who jointly runs the International Biotech Trust, says the IPO market “tends to be either a feast or a famine, and right now it is a good time to invest in IPOs. The innovation has been happening for a while, but there is certainly a greater level of awareness around what is happening now. More people know what a third-stage trial is than ever before. What we are seeing is the smaller, often more innovative companies partnering with the larger pharma companies, as the latter have the manufacturing and distribution capacity”.

She says one of the areas at the forefront of healthcare innovation right now is in terms of cells. She says it is increasingly the case that medics will be able to remove unhealthy cells from a patient and replace them with healthy cells as a way to cure an ailment. 

She adds: “All of the extra interest in biotech means that in February this year we thought it had overheated, in terms of valuations, and so we pulled some capital out. But there has been a bit of a sell-off since then, and now that area looks more attractive. We tend to go to events like trade shows to source new ideas.”

Schroeter says many of the emerging companies in the biotech area will be acquired by the bigger pharmaceutical businesses in the years ahead, providing a return for investors, but he is less keen on investing in the large pharmaceutical companies that tend to only work on a small number of products.

Martyn Hole, equity investment director at Capital Group, says the best way to invest in the emerging healthcare trends may be to own the companies that manufacture the surgical implements, as for those companies it matters little which of the new drugs work, as they expect to be able to sell the instruments to all of the companies, whether their products are successful or not." 

Matthew Tillett, who runs the Brunner Investment Trust, says large-cap pharmaceutical shares offer investors the opportunity to access more mature businesses that are also bringing new products to the market. 

David Thorpe is special projects editor at FTAdviser