Are the underlying investment themes in healthcare accelerating?
Co-head of Healthcare
Change is rarely easy, especially in an industry that is incredibly complicated and yet so vitally important to so many. The healthcare industry is going through a period of significant structural change as it tries to address the challenges of ever-rising demand in the face of limited resources. Importantly, this structural change is creating new and exciting themes in healthcare, which then generate specific investment opportunities offering growth over the next 5-10 years. While not an exhaustive list, we would highlight the following themes that are becoming ever more visible and possibly accelerating: disrupting the delivery of healthcare services; consolidation; outsourcing; prevention.
2021 has produced tangible evidence that some of the themes mentioned above are already gaining traction. Material changes to the delivery of healthcare are critical given there is an acute need for systems globally to generate greater efficiencies in order to deliver more healthcare to more people for less money. We have seen a number of examples of the industry investing in technologies and services this year that are designed to do precisely that – generate efficiencies. In February, for example, Brookdale Senior Living announced it has agreed to sell 80% of the equity in its hospice, home health and outpatient business to US hospital operator HCA Holdings. This is an interesting investment by HCA Holdings in a business that operates 84 outpatient centres, 57 home health agencies and 22 hospices – all locations that could offer lower-cost settings to deliver care.
Along similar lines of delivering care in a lower-cost setting, US health services companies Cigna and UnitedHealth both announced investments that are geared towards generating efficiencies. Cigna announced its intention to acquire MDLive, one of the largest telehealth vendors in the US with a particular expertise in the fields of behavioural care and dermatology, and UnitedHealth is looking to acquire Change Healthcare, a business that uses data analytics to improve clinical decision-making.
The healthcare industry is highly fragmented, with the more established and more mature industry participants boasting strong balance sheets and robust cashflows. Those observations lead us to believe consolidation will be an ongoing theme as management teams look to complement internal assets and optimise future growth prospects. Indeed, there has already been a number of deals in 2021 in the areas of healthcare services, contract research, medical devices, biotechnology and pharmaceuticals. We expect that trend to continue.
Outsourcing is another theme we believe has a durable growth outlook as customers look to retain flexibility, rationalise costs and distance themselves from non-core activities.
Outsourcing is another theme we believe has a durable growth outlook as customers look to retain flexibility, rationalise costs and distance themselves from non-core activities. Clinical Research Organisations (CROs) are well positioned to capitalise on this opportunity, offering services that include consulting, clinical trial recruitment and execution, and commercial expertise. Indeed, CROs Iqvia, PPD, PRA Health Sciences and Syneos all produced strong Q4 2020 financial results, coupled with robust outlooks for 2021. It is also reasonable to argue that the management of ICON share our views given their decision to part with $12bn to purchase PRA Health Sciences.
The COVID-19 crisis has shone a light on the incredible innovation within the healthcare industry, as well as highlighting the importance and value of preventative medicine. Prevention is, or should be, the cornerstone of all public healthcare systems given the obvious benefits of early intervention and better outcomes for patients. What better example is there than the COVID-19 vaccines? Not only are they highly effective at preventing COVID-19, but they are also showing their real-world value in terms of preventing hospitalisations, an invaluable property given the acute pressure being exerted on healthcare systems globally. Looking further out, logic would dictate that the recent capital investments made in terms of diagnostics infrastructure will be utilised rather than left to gather dust. Testing menus will expand, early diagnoses will become more wide-spread and biomarkers will be used to identify conditions early. If true, then we can look forward to greater co-ordination of care, targeted treatment regimens and superior outcomes.
James Douglas, PhD
James joined Polar Capital in September 2015 and is a Fund Manager for the Healthcare team. He was appointed Co-Fund Manager for the Polar Capital Global Healthcare Trust in May 2017.
Prior to joining Polar Capital, James worked in equity sales specialising in global healthcare at Morgan Stanley, RBS and HSBC. James also has equity research experience garnered from his time at UBS, where he worked as an analyst in the European pharmaceutical and biotechnology team. Before moving across to the financial sector, he worked as a consultant for EvaluatePharma.
Gareth Powell, CFA
Gareth joined Polar Capital in 2007 to set up the Healthcare team. Prior to Polar Capital, Gareth worked at Framlington, where he began his career in investment management in 1999. Soon afterwards, he joined the Healthcare Team in 2001 and helped launch the Framlington Biotech Fund, which he managed from 2004 until his departure.
Gareth studied biochemistry at Oxford, during which time he worked at Yamanouchi, a leading Japanese pharmaceutical company (later to become Astellas). As well as this, Gareth worked for the Oxford Business School and various academic laboratories including the Sir William Dunn School of Pathology and the Wolfson Institute for Biomedical Research.