Navigating the future of healthcare investments

Staci West 07/12/2023 in Equities, Specialist investing

Gareth Powell, manager of the Polar Capital Global Healthcare Trust, tells us more about the implications of an aging population, with nearly 14 million baby boomers approaching retirement in the UK alone. Gareth addresses the potential long-term boost in healthcare investments amid rising healthcare needs globally. Emphasising the importance of efficiency and productivity in healthcare delivery.

The interview also explores investment strategies focused on innovation, covering recent breakthroughs in healthcare, including advancements in dementia treatment and obesity. We wrap on the recent underperformance of healthcare stocks and three key themes that present significant opportunities for investors in 2024 and beyond: utilisation, product cycles, and consolidation.

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I’m Staci West, and today I’ve been joined by Gareth Powell, manager of the Polar Capital Global Healthcare Trust. Gareth, thanks for joining me today.

[00:09] Hi, Staci.

Now, much of the developed world is ageing, almost 14 million baby boomers are heading towards retirement in the UK alone. And so my question for you is, as their healthcare needs rise and the global population’s healthcare needs rise, can investors expect a long-term boost in healthcare looking forward?

[00:34] So, that’s a critical question. The drivers of the demographic shift, particularly currently in developed markets but also it’s going to be highly relevant in emerging markets, particularly a place like China, which obviously has had the single child policy in place, that’s going to create significant challenge.

The issue – if we just focus on developed markets for this question – the demographic trends are very positive and are a driver for growth, but there’s a limit to what can be spent on healthcare. So the way we try and come at it is that we think developed market healthcare, the delivery needs to become much more efficient and productive. And so we try and invest in companies that sell products or services that can actually achieve that. And we’re big believers in innovation helping, ultimately, drive productivity. But the key focus for us is products and services that keep patients out of hospital.

As an example, to reduce cost, if a patient does have to go into hospital, can it be a, say a medical device that allows a minimally-invasive procedure versus open surgery? That means that a patient’s recovery time will be quicker so they can come out of hospital quicker. Is there something that can be done after, get a patient again out of hospital quicker for recovery such as rehab at home?

So, all those different angles that try and drive more efficiency and you know, more for less if you like. And one of the biggest ways of achieving that is avoiding big inpatient hospitals because that’s where the delivery of healthcare is so much more expensive. So, that demographics big positive driver, but we’ve got to pay for it. And so that’s what we have to think about at a deeper level.

And you mentioned innovation and products there, something that you’re particularly looking for, so maybe we can focus on that. Can you tell us a little bit more about recent breakthroughs in dementia, for example, and what exposure that you have to that area?

[02:53] So, it’s a really exciting area. So when you’re investing in healthcare, product companies are about 80% of the universe. So, think pharmaceuticals, you know, small, mid or large; biotech similar; medical device companies. So, all of these product companies, the key driver in terms of as an investor is new product cycles. Because if you have successful new product cycles, that tends to lead to significant return. So, it’s really important that the sector continues to innovate and drive new product cycles.

So you give an example, Alzheimer’s, there’s two big stories in healthcare land at the moment on products;, obesity is the one that there is most focus on [and] there’s been a breakthrough in Alzheimer’s with a new product approved which we think is great, but the effect size of the drug is fairly small, so we think there will be uptake, but not that significant, so we’re not exposed to that.

Obesity we have exposure in the portfolio to. There’s been launches from Novo Nordisk and Eli Lilly with their two products. And the weight loss with these drugs is quite significant. There’s been clinical data from Novo’s product through a study called Select which showed benefits outside of weight loss, on cardiovascular health. So that is the product cycle that people are most excited about. So there are numbers being bandied around that the obesity market could be worth 80 to a 100 billion by 2030 in revenue, annual revenue, which is obviously enormous. And that is conservative based on a relatively small penetration of these products. So, definitely exciting area.

Alzheimer’s also. I think what’s crucial with Alzheimer’s is getting a product out there, then hopefully that will drive further innovation and we can get much more efficacious products. And then there are new product cycles outside of those two that are causing investors to be engaged. So, the product cycle story for healthcare is improving and I think that’s a positive driver for the sector.

Healthcare has struggled this year, it’s lagged behind. Why is this? What’s happened this year that’s caused this lag?

[05:37] It’s definitely true that healthcare’s really struggled this year across you know, large mega cap and smaller mid cap healthcare was doing okay in the first half, it was very weak in the third quarter. So in the penalty box if you like.

Healthcare was really strong, certainly large mega cap from September ’21 to the end of ’22. And that was driven by fears over slowing growth in a stagflationary period. Healthcare outperforms, in terms of the economic cycle, if you think of the four quadrants; early cycle, mid, late stage and slow down or recession – those last two quadrants is where healthcare stocks outperform. This year, the consensus was early in the year, that we were going to hit a recession. And so investors were very defensively positioned. They owned lots of large mega cap healthcare fitting with that idea.

However, what’s actually happened has been the reverse, and particularly in the US, economic growth has been much stronger than people expected. And that’s why healthcare has been a source of funds basically because of investors moving into more cyclical areas of the market such as tech and industrials or what have you. And they’ve, you know, particularly tech’s been very strong, so that’s been the driver.

If you look at more recent data as in very short dated, it is suggested that the economy in the US is slowing. And you know, if that is proven to be the case, that should help turn the sector from here. And that is relevant, particularly for large mega cap, but also small and mid have suffered. And there is the potential for a significant rally there considering where valuations have got. But essentially it’s the macro that’s driven the underperformance this year, which is very significant. If you look at a basic level, it’s the worst in 30 years, but we think it’s now an opportunity, so that’s what we’re really focused on.

And where are you seeing that opportunity as we are on the cusp of 2024? Is there something that you’re particularly excited about? Maybe it’s obesity market opening up that you already mentioned, or is it something else, a particular innovation or sub-sector? What are you looking for, for 2024?

[08:20] Yeah, so three big themes for us. We’re playing that in stock. So firstly, utilisation. So if I take you back, let’s say 2020 through to the end of ’22, healthcare trend dipped significantly, sort of the growth in utilisation, which had been strong for obviously many, many years for the reasons we talked about earlier. For three years, we’ve seen a below trend utilisation and that was because healthcare systems were obviously dealing with covid. We’re now to a point where we’re starting to see utilisation heading back towards trend, but that difference between trend and what we’ve had for those three years is we’ve got this kind of hole, which is backlogs, so you know, it’s relevant across the world. Obviously you can use the NHS as an example, with backlog doubling through that time period. So, utilisation we feel is likely to stay elevated for quite a period and that should drive strong growth for the industry.

Secondly, the product cycles that we’ve talked about – obesity, Alzheimer’s, other products. So that’s really important and we think that again can drive strong growth and hopefully strong returns. So that’s the second theme.

And the third theme is consolidation, M&A. Healthcare’s the most fragmented industry, so it’s a long-term trend. As companies aim to become more efficient and take market share, consolidation will be a driver. You’ve also got a particularly acute sort of driver, if you like, of M&A and that’s large and mega cap pharma and biotech buying smaller companies because the bigger companies as a whole are facing revenues pressures in the second half of the decade, and that’s driven by patent expiry. So they’re looking to buy assets to replace those products. So, we’ve got big focus on biotech, for example, that fits within that theme; product cycles, M&A, we’ve got a focus on utilisation, so healthcare facilities, healthcare equipment, healthcare supplies, distributors, services.

So, those three drivers we think are really powerful. They’re relevant today and they will be relevant for the next two, three plus – well, and some of those relevant in the very long term. And we’re hopeful particularly where healthcare sits today, that those drivers can help power some substantial returns from these levels.

Gareth, thank you very much for that. It definitely seems like healthcare is something that, as you said, is not just poised for growth next year, but 3, 5, 10 years, lots of long-term trends that you mentioned, so thank you for that. And if you’d like more information on the Polar Capital Global Healthcare Trust, please visit FundCalibre.com.

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