Building a diversified sustainable healthcare portfolio
Investing in healthcare is complex. You must get into the weeds of the molecular R&D environment, understand a range of differing competitive and regulatory terrains, and understand just how hard it is to develop software and hardware in medical devices and digital therapies. All this without taking into account the rapidly changing, post-pandemic landscape.
But, at the same time, on another level, it is simple: pharma, makers of medical devices, diagnostics developers and digital health developers must offer value to all stakeholders – to patients, healthcare providers and payers.
Value is the big, overarching theme in sustainable healthcare investment for Dr Michael Schröter and Dr Nathalie Flury, co-heads at the Global Equity Sustainable Healthcare Fund. And it is clear that much value is to be found beyond classic biotech. “Delivering care and reducing cost can also be achieved with medical devices and digital applications, and through service and diagnostics,” says Schröter. "We are investing in all these subsectors. We also see more interplay between these subsectors.”
While biotech has the largest weighting within the fund – around 38 per cent1 – Flury and Schröter are clear about the need to limit this and to achieve diversity over the five investment sub-segments they have identified. “I have managed pure biotech portfolios in the past, and it is a volatile segment,” says Flury. “If things don’t work for developing or approving a product, it can mean minus 60 to 70 per cent for a stock; our investment philosophy allows us to find companies in many segments of healthcare.”
Doubling down in digital
The flexible approach paid off for the fund early in 2020, as the scale of disruption owing to the pandemic became clear, along with the merits of remote care. The Sustainable Healthcare Fund was agile enough to double down, extending its weighting to 25 per cent in digital and telehealth investments in response to the pandemic, says Flury. “We were 5 per cent invested in digital health solutions in January 2020, mainly in Teladoc Health and Ping An. By March, we realised the pandemic was not going to be over quickly. We saw the pressure the system would be under, as well as the increasing acceptance of these approaches by patients and doctors, and we realised we had to increase our position in digital healthcare stocks.”
Even now, the wider digital health sector holds further promise to help us all understand and manage our health better in future. However, for investors, it is also frothy and replete with risk. Choosing where to find value among many thousands of health and wellness apps, during such a fervid phase of ever pricier venture capital deals, discernment and specialist knowledge are all. “From an investment standpoint, you need to watch out. There are plenty of companies in the digital space. There are 600,000 health apps, for example, but you can count on one hand those which are profitable,” says Schröter.
Without an understanding of the sector’s complexity, an over-confident, technology-first approach to innovation in the sector is unlikely to end well. It is a lesson the tech giants such as Google and Amazon, which are eyeing the opportunities in health, have experienced first-hand, he adds. "It’s not a technical problem you are typically solving. Usually it is about integrating a solution into a complex healthcare environment."
For those who understand the interlocking complexities of care delivery pathways and reimbursement processes, there is great scope to back the right kinds of digital healthcare innovation. Companies that focus on big data to help identify optimal treatments, or appropriate care follow-ups, for example, identifying at-risk patient cohorts that can be engaged earlier to head off disease progression, offer one interesting digital healthcare investment theme with great cost-saving potential.
Another theme in this area is in deploying monitoring technology to patients. One US healthcare provider uses phones to detect postpartum depression, enabling it to take preventative measures. Digital therapeutics that help patients understand and adapt their behaviour and approach to their disease are also showing great promise in areas including metabolic and mental health.
Backing the mid market
In conventional pharma, when assessing a prospective biopharma investment, Flury and Schröter look for a range of features beyond the usual due diligence around financial and regulatory risks. Products must have clear competitive advantages over existing ones, including not only efficacy but also how they can help improve overall standards of care, as well as value to providers and payers. “Is this product better than what’s on the market? And we prefer companies with more than one product because, with single product companies, the full value is in one place and, if it doesn’t work in phase 3, the risk is very high,” says Flury.
Another important feature of the fund’s approach is its mid-cap bias (investments valued at between $500 million and $20 billion) across all subsectors, says Schröter. Much of its investment is focused on the US, but, he says: “This is only a reflection of where the bulk of innovation is happening today. That will change over time. Our Asian exposure will change as more innovation comes out of the region.”
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