At the moment, the healthcare sector is still underdeveloped digitally, while the world population is getting older and more chronically ill. Nevertheless, this sector is also slowly but surely embracing the Internet of Things. Henk Grootveld sees this as a reason to invest in digital healthcare.
“This is an excellent opportunity for the thematic investor”, said Henk Grootveld, head of trends investing and fund manager of the upcoming Healthtech Fund at Lombard Odier IM, in a conversation with Fondsnieuws, Investment Officer Luxembourg’s sister publication. At the start of 2020, Grootveld left Robeco with his colleagues Jeroen van Oerle and Christian Vondenbusch to develop the thematic Golden Age Strategy for the Swiss asset manager from Rotterdam.
As of 20 September, the healthtech fund, which until now was part of that strategy, will operate as an independent UCITS fund. The goal: to invest in companies that invest in better and cheaper care through digitalisation and automation. The healthtech fund that he manages invests in companies that enable online consultation between doctor and patient, producers of measuring equipment and online pharmacies, among others.
Need for solutions
Research by the American research bureau CMS shows that the costs of global healthcare will rise by 5 per cent a year this decade. In the US, 60 per cent of adults have more than one chronic condition. Of the 4,000 billion dollars spent annually on health care in the US, 2,500 billion goes to the treatment of chronic diseases.
“Our society is also ageing rapidly,” said Grootveld. “As a result, we have an increasing number of chronically sick people and therefore a cost item that threatens to spiral out of control. Add to that the underdeveloped digitisation of the healthcare sector, and you can see the potential of this theme.”
Grootveld stated that since Covid 19, this potential has increased enormously. “Take communication between hospitals. “Before the pandemic, patient data “could not” be shared between hospitals because they used different software, or so the argument went. This was a ludicrous argument, because during the height of the crisis, both patients and their data were taken from one hospital to another. Within the Netherlands, but also to Germany.”
Three important trends
Grootveld focuses on three subsectors: connected care, efficiency, and prevention. “We assume that online consultations with a doctor will become the norm, as will wearing connected devices that constantly measure vital functions. Diabetes patients can already track their blood glucose levels with a small device on their body. That is typical connected care.”
A second important trend in health tech is automation and robotisation. “Why on earth is there no 24-hour pharmacy in the Netherlands (or Luxembourg)? In China there were no pharmacies at all before the pandemic broke out. Everything happened in the hospital. If you needed medicine, you had to go to the hospital pharmacy. A problem arose when that was no longer possible because of Covid. Online pharmacies that work day and night were developed very quickly. Ali Health from Alibaba and JD-health, the largest online healthcare platform in China, are particularly advanced in this respect.”
“In Europe, you have Switzerland’s Zur Rose AG in that corner of health tech. In the United States, you see Amazon picking up on it, but CVS Pharmacy and health insurance companies are now also responding to that trend. In Europe they are independent companies, in China they are subsidiaries of big-tech platforms and in America you see a mixture of those.”
A third trend is prevention. A unique new development is the so-called “liquid biopsy”. That is a technology where with one drop of blood a range of cancers can be detected at a very early stage. This turn from cure to prevention is an important trend that can be capitalised on within this theme.
Biggest risks
One of the biggest risks in health tech is product failure. This summer, lawsuits against Royal Philips piled up because the company had to recall millions of sleep apnea respirators. The devices blew potentially carcinogenic pure foam particles and gases into patients’ airways.
“Any mistake in the health sector can have far-reaching consequences. If a real-time glucometer provides incorrect information to a diabetic or administers the wrong amount of medication, it is absolutely problematic.”
“But before products in this sector can be launched on the market, they have to be approved by authorities. That barrier to entry builds in some degree of certainty for investors, but what happened to Philips can happen to any company.”
The valuations of shares in this sector are also an important risk measure, Grootveld said. The shares of companies in which the fund invests are usually paid 20 times their earnings, but multiples of 100 times their earnings are not ruled out.
Very expensive shares
“We prefer to invest in forty to sixty “pure play” stocks, so companies that are one hundred percent in a niche of health tech. We have very expensive shares that are growing fast but whose position may not exceed 1 percent of the portfolio. If the shares are priced more attractively, we apply an upper limit of 4 percent.”
Grootveld emphasised that the new fund will not be created overnight. Over the past five years, the Healthtech carve-out of the Golden Age fund has achieved an average annual return that was more than 6 percent higher than the return of the MSCI Healthcare of world index. He also saod there is demand for a separate Pension Reform fund, which is also part of the Golden Age Strategy, “but this is not yet concrete, let’s make this fund a success.”