Scottish Mortgage Investment Trust: building relationships with unlisted companies
Part two of our interview with senior research analyst Ryan Lightfoot-Brown and Tom Slator,...
The National Health Service turned 70 on 5 July 2018. It’s one of the UK’s most loved institutions, the envy of many other countries, playing a vital role in many of our lives.
However, with increasing life expectancy, the government – like many others in developed markets – is finding it increasingly difficult to maintain healthcare funding.
Governments have a few choices in this respect. Firstly, they can borrow more. However, this is more of a quick fix than a long-term solution. Second, they can raise taxes – but that’s not really a vote-winner. Finally, they can spend less but do this more efficiently.
This is where the private sector can help. Companies that are able to supply better services or products for less money are likely to emerge as the winners.
A number of investment companies are using their scale to invest in businesses which are attempting to solve some of the biggest health challenges of our time by providing transformative treatments and technologies.
James Anderson, co-manager of Scottish Mortgage Investment Trust, recently explained: “Scottish Mortgage’s most important role is to provide patient, supportive capital to help address the most serious problems in the world.”
The fund has investments in companies that aim to tackle problems that seem intractable. Two such companies are Denali, which treats Alzheimer’s, and Unity (increasing healthy life spans) – both have just gone public.
“Perhaps our most crucial investments in recent years have been in the gene sequencing pioneer that is Illumina and its unquoted spin off Grail. We helped defend Illumina from an unwanted and unwarranted takeover by Roche, so it could continue to focus on driving sequencing performance up and costs way down,” said Anderson.
“Meanwhile Grail is showing serious signs of being able to identify many of the most ravaging cancers at much earlier stages through its remarkable liquid biopsy innovations. Their approaches are both causing particular excitement in China, as it seeks to confront modern healthcare requirements for the first time. We’re excited by the prospects,” he added.
China isn’t the only emerging market that is looking to provide better healthcare to its population. India is starting along this path too.
According to the team behind the GSAM India Equity Portfolio, India has a higher incidence of diseases compared with most emerging markets and an acute shortage of good quality state-run hospitals. A more acute problem is the fact that a whopping 65% of total healthcare expenditure in India is met out-of-pocket by patients and their families, as opposed to through insurance payments or through state-funded programs.
It is against this backdrop that the National Health Protection Scheme (NHPS) – already dubbed ‘Modicare’ for its phonetic resemblance to the US Medicare program ‘Obamacare’ – was unveiled in India’s Union budget earlier this year.
Its objective is to provide coverage of medical expenses up to a specified amount per household each year for over 500 million Indians. It will target individuals from financially vulnerable backgrounds, a demographic that accounts for 41.3% of the population. It is being touted as the world’s largest government-funded healthcare program in both coverage and cost.
It aims to initially provide three programs – old age pension, life insurance and maternity benefits – through a network of public and private hospitals.
Commenting on the initiative, the GSAM team said: “It is important to recognise that while the impact could be huge, the program is in a very nascent stage and as such we need to temper our expectations a little. However, we do believe, over the long term, that this could be a game-changer for the industry. The Indian pharmaceutical space has been dominated by generic drug exporters and that could be on the cusp of change, with India moving towards universal health care. Similarly, unprecedented benefits could accrue to hospitals and clinics, and insurance companies alike.
Samir Mehta, co-manager of JOHCM Asia ex Japan, is more cautious: “It is a very ambitious plan with several significant roadblocks: funding, inadequate infrastructure and the reluctance of insurers. It feels like a very populist move ahead of the upcoming elections, which have to be held by May 2019.
“Thailand introduced something similar almost a decade ago. Even though Thailand had better infrastructure, hospitals were reeling and complaining of losses. Indonesia tried something similar about five years ago and the result was a ballooning government deficit and an attempt to bluntly cut medical fees and pharma prices. I think it will remain on the drawing board for a while.”