What are the key global drivers of the healthcare sector?

By Dries Dury, International & Sustainable equity fund manager at DPAM


In this interview, Dries Dury, International & Sustainable equity fund manager, dives into healthcare sector from a top-down and bottom-up perspective. He also identifies ESG risks and opportunities going forward.

Looking closer into the Healthcare sector, which are the main drivers from a top-down perspective?

We have identified several top-down themes that are impacting the healthcare sector structurally. The first theme is aging: the 60+ population is growing at 3% per year worldwide. As a result, the share of the 60+ group in the total population will double by 2050. Because older people need more healthcare, global aging creates an interesting demand backdrop for healthcare investors. However, healthcare costs are already high and set to further increase, so we do need a more value-based and efficient healthcare system. The efficiency of healthcare systems will remain as a top priority on the political agenda. A recent example is US democrats’ push for ‘Medicare for all’, arguing for a stronger public healthcare insurance system. This political pressure made healthcare one of the worst performing sectors on the stock market this year.

A second major theme shaping healthcare is the trend towards biopharma. Biopharma focuses on biological medicines, which are based on living organisms, as opposed to traditional drugs, which are synthetic molecules. Today, biopharma represents close to half of pharmaceutical R&D investments, but only about a quarter of pharma sales. Medical technology companies that make lab equipment needed for biopharma research and production, benefit tremendously from this trend towards biological medicines.

Another critical top down theme is related to the rising importance of China. The country aims to become one of the world’s leading pharmaceutical research nations. This is a long term trend which is not so sensitive to its economy, as it is a strategic decision of the government. In order to achieve its goal, China needs to invest a lot in laboratories, another great boon for many medical technology companies that are selling tools to these laboratories. Besides, China is seeing strong growth of its middle class, as it’s the case for other emerging markets. One of the first things that wealthier people tend to purchase is better healthcare.

And regarding the bottom-up view? What would you highlight?

As implied before, a key subtheme for us within the healthcare sector is medical technology (med-tech). This is a very diversified subgroup within healthcare, but two major categories are Life sciences & diagnostic tools and medical devices.

We like companies focused on Life sciences & diagnostic, that mainly develop and sell tools used by scientists in laboratories for many bottom-up reasons. These tools, like chromatography or spectrometry machines, are very difficult to produce and take many years of innovation and research. Besides, scientists and labs tend to be sticky customers that focus more on quality and reputation than price. These high market barriers to entry result in high profitability.

Even though life science & diagnostic tools represent a small share of total healthcare expenditure, it is a very relevant subgroup, because it leads to better research and diagnostic outcomes, which tend to reduce total healthcare costs and improve outcomes. In med-tech, prices typically are decreasing year after year; only new innovations come with higher pricing.

Another element we like in med-tech is that it is a defensive subsector with high revenue visibility. Its business is largely recurring due to the need of so-called “consumables” in order to use the machines in the labs. A high share of recurring revenues make these companies more stable.

Which is your actual exposure to medical technology? You pointed out the US market as the main market for med-tech companies… do you see opportunities in Europe as well? Can you mention some companies?

We have quite a large exposure to healthcare. It is the second biggest sector in our global portfolios and med-tech represents the majority within that sector. This is a high deviation from the benchmark.

Some companies we like are Agilent, Danaher and Thermo-Fisher. Indeed, many leading med-tech companies are American, an illustration of why we like to invest globally. However, there are many interesting companies in Europe as well, such as Diasorin and Lonza.

From an ESG perspective, which are the main risks and opportunities within healthcare?

Our approach towards ESG indeed is not only about identifying and avoiding risks, but also about finding opportunities. All things considered, improvements in research and diagnostics in order to achieve better healthcare outcomes is already relevant from an ESG perspective. Nonetheless, within healthcare there are often litigations, so risk avoidance is important. Pharma companies have typically been more subjected to litigations. To some extent, this is also true for medical devices companies, because they often implement an external element into people’s bodies, and there is always the risk of rejection or complications, and therefore the risk of litigation. However, if you create tools for a laboratory you are avoiding this risk. Consequently, these companies face less litigation risk. This is another thing we like in Life science and diagnostic companies from an ESG perspective.

The other point is about personalized medicine. In the past, the way we treated diseases was “a one pill fits all” cure. This mindset is not so logical taking into account that the human body works in different ways. Today, with our broader understanding, we see a big trend towards personalized medicine. This is also possible thanks to better diagnostic & life science research.

There are arguments for optimism within the field. Since the moment we are able to read the human DNA (first time in 2003), the genomic revolution has been extraordinary. At that moment, it cost almost $3bn to fully sequence the human genome. Looking forward, it is likely DNA sequencing will cost no more than $100 and we will be able to do it in a couple of hours. This will lead to massive adoption. We are able to not only read DNA, but also modify it using relatively easy to use CRISPR technology. As a result, scientific research in the genomic field is really “exploding”.

At the same time, this is raising the question of ethics. Thought leaders in the field are trying to approach how to deal with this and reach clear standards. The technology is known, which in our view means it will be further developed and adopted. We humans need to be very prudent with our approach. Changes in the DNA have been happening throughout evolutionary history in a natural way, mainly through a process called natural selection. For the first time in history however, humans can modify DNA in a much faster way at their discretion. On the one hand, this is a fantastic opportunity to get rid of diseases. But on the other hand, we need to be sure of what we do, assessing the risks in the best way possible and assuming responsibilities.


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