Client Affairs

Healthcare Investing On The Front Lines

Jackie Bennion Deputy Editor 18 January 2021

Healthcare Investing On The Front Lines

With all eyes on the vaccine rollout and what that means for economic recovery this year, we look at examples of where investment is heading in the health/medtech sector.

In a sign of what lies ahead, last week a consortium of big US health and technology names announced it has created a digital vaccination passport to help economies and workers get moving again. The Vaccination Credential Initiative, partially funded by the Rockefeller Foundation, with Microsoft, Oracle, the Mayo Clinic, joining a host of other marquee collaborators, said it is already working with airlines and governments in anticipation of rolling out a universal system to verify a person's COVID status before travel.

Investment has been pouring in to health care, and the sector is expected to grow to $1.3 trillion by 2027, with companies developing digital health services expected to attract the lion's share.

Developers in the space are hoping that the pandemic will transform the investment landscape in much the same way that climate risk has woken up capital markets.

“Globally, we have had to deal with Ebola, Zika virus, bird flu, and now COVID-19 in one decade, but the economy must adapt to a new future," said Paul Stannard, chairman and general partner of the Vector Innovation fund. The alternatives fund, administered from Luxembourg, invests in companies seen as best placed to transform global healthcare markets, and among many attracting thematic investors. He points to advances made in telemedicine “in just a few months” of lockdowns that have made it easier for doctors to monitor and support many more patients. The crisis has also proven that novel technologies few had the faintest grasp of a year ago can be commercialised in months, rather than years.

These pressing times have lit up the sector.

Baillie Gifford, which had a standout 2020 thanks in part to the firm's long exposure in Tesla and other big winners, recently launched the UK OEIC Health Innovation Fund to invest in companies tackling the world’s health challenges.

The portfolio has around 35 listed mid-size high-growth companies, which it says are driving changes in therapies, diagnostics and digital technology.

The Edinburgh-based firm already invests around £30 billion in health-related companies across several funds. “With increasing convergence in the fields of science and technology, medicine is likely to be further revolutionised towards prevention and cure,” James Budden, director of marketing and distribution said.

For the moment, he says, the group is focused on developing UK awareness for the fund.

After a year of trying to wrest the virus, it is unsettling how much economies are banking on science to lead them out of the crisis.

Two factors will affect how economies fair in 2021, Michel Perera CIO of Canaccord Genuity Wealth Management said. First is the speed of access to the vaccine as some countries have negotiated better deals than others. Second is the willingness of populations to be vaccinated.

“Only 54 per cent of French say they will, and 64 per cent of US citizens. This compares to 87 per cent in India and 85 per cent in China,” Perera said, who, like many, expects to see Asian markets outperform and lead the way.

Institutional money is moving from traditional healthcare infrastructure into targeted thematic approaches. In November, Vector announced that it was putting $300 million into three sub-funds targeting pandemic protection, new technologies, and future healthcare supporting businesses developing precision medicine, point of care services, and AI technologies. Access is reserved for institutional investors, ultra-high net worths and family offices.

The attention on public health is also creating more listing opportunities for already established healthtech firms. One is the Finnish firm Nightingale Health. Its health data platform combines blood-testing technology with the ability to use blood-based data to detect future chronic disease risks.

“Our next goal is to utilise the platform to establish a primary care system that helps prevent diseases by equipping people with better information about their health,” Teemu Suna founder and CEO said. Since its launch in 2014, Suna has raised around €40 million to bring the technology into global healthcare.

“COVID-19 has demonstrated that current healthcare operations will break if there is a significant increase in the number of people falling sick," he said, which many health systems have gone into the new year facing. His big-ask is building "a parallel health system that specialises in disease prevention."

Riding the trend
The company is also riding the megatrend of people wanting to manage their own health through a growing number of health and performance apps. It has appointed Swedbank’s Finnish branch to explore growth options, including a possible listing on Nasdaq Helsinki First North. Figures last year showed that 71 biotech companies set a new record for the sector raising around $16 billion collectively through IPOs.

Talking to Goldman Sachs about vaccine roll outs rebooting stricken economies, Gavi's CEO Dr Seth Berkley, said his group aims to have 2 billion doses available in 2021 -- a billion for low-income countries and a billion for upper-middle and high-income countries. The Gavi alliance was set up by the World Economic Forum 20 years ago to ensure a fair rollout of means-tested immunisation programmes, with richer countries supporting poorer ones. It vacinates around half the world's children.

As it stands, the world distributes around 3.5 billion doses of vaccine a year. Suppressing COVID-19 means at least doubling that, Berkley said. “What we don't know yet is what the yield is when you scale up to large production for all the vaccines, not just the three we've talked about.” He said that AstraZeneca expects to produce at least 100 to 200 million doses a month by spring.

On fears that vaccines are being rushed into service and won't be effective against mutations, Berkley said: “We’re going to see mutations that will change constantly. That's the nature of viruses. So far, the part that we're attacking is stable, has been stable. We have to keep in mind that we've had a vaccine for viruses like measles for more than 50 years. And that vaccine has remained completely effective.”

Paul Major, who manages around £850 million for the London-listed BB Healthcare Trust, is another drawing attention to the perils of current health systems.

“We know the bulk of your lifetime health expense will come in your later years, and we know you will enjoy increasingly more of these years. If we do nothing, the healthcare system will consume all our marginal wealth," he said.

"A significant double-digit percentage of doctors working in the UK weren’t trained in the UK. Training doctors is expensive and we are basically going around stealing other peoples’. It is great for us as a rich country, but morally very questionable,” and not sustainable, he said.

Health systems need to break their dependency on this high need for human capital, he added. "That's really what our fund is about, recognising that there are different ways to deliver healthcare."

The fund enlists three investment principles: can you enable doctors and caregivers to make better decisions; can you improve outcomes; and can you lower the cost? “You need to do all of those things to drastically improve the efficiency of any system," Major said.

It has invested in firms providing real-time information for patients managing chronic conditions; businesses making novel surgical robotics or using 3-D printing to fine tune orthopaedic tools for complex ankle and shoulder joints; and businesses providing diagnostics outsourcing for clinical trials, as a few examples.

The trust operates as an exchange traded fund, attracting mainly small to mid-size investors. "We don’t have many large multi-million investors in the fund," he said.

What has changed over the last 12 months among investors is a message getting through "that healthcare could actually all be done very differently," he said. “The NHS historically has not been the world’s most innovative organisation. But that is changing and COVID is a great example.”

Looking back at health investing over the last 20 years, clients have made the most returns from innovative treatments in the medical device and drug (therapeutics) category, Major said.

“If you look at healthcare spending, those areas amount to around 10 or 15 per cent of the total spend. All the boring things like admin, and in particular the intersection between doctor and patient, have never been the main sources of innovation or opportunities for investors to make returns. But they amount to 85 per cent of all the costs.”

That is the innovation gap that this pandemic has further exposed, he suggested. “Until now, we have basically been ploughing a very narrow furrow as investors.”

As for the immediate fortunes of vaccine delivery, "the challenge for the government, particularly the UK, is going to be convincing people that this is the right thing to do,” Major said. In his view, its credibility on COVID "is pretty much in the gutter and, frankly, exactly where it deserves to be."

He agrees that the UK government has done well in procuring for the nation and spreading its bets across the different approaches. It has also been clever in stating that it will donate any orders not used to other countries, he said. "Clearly the Gates Foundation, Gavi, WHO, all sorts of different donors are going to be involved in making sure this gets to everybody because it is an endemic global problem.

“It’s very interesting. The risks are all on you personally, and if you are in a lower age bracket, the benefits are to society not you directly so you are being asked to take an uncertain level of risk for a benefit that doesn’t actually accrue to you.

"When we all got vaccinated for measles, mumps, rubella, polio, we knew when we were kids that getting these diseases was bad stuff and we didn’t want to get it. Data with COVID is a lot more unequivocal.”

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