Fascinating technology

How to target opportunities in lucrative health technologies

  • Purity and Income Growth Matters for Healthcare ETFs
  • How to value avant-garde pre-income companies

With over 7.7 billion people on the planet, the idea of ​​a demographic crisis won’t shock anyone, but the underlying demographic problem is just as serious. Many people will see falling birth rates in large parts of the world (not just Western and Democratic Asia, but Russia and China as well) as a positive. Yet this involves a series of critical points where there are not enough young members in many societies to work, pay taxes, and care for the growing proportion of older people.

Technology must therefore provide many of the productivity and development solutions that the world needs, especially in healthcare. Automation and robotics, supply chain management and smart devices to manage patient needs could ease the strain on human labor. Health technology is therefore an area of ​​the economy with important structural drivers, but investors still have to do their homework.

Healthcare tech is a great topic, but every trend needs a health warning

Thematic investing has its drawbacks. Concentrating holdings and moving away from market weights is what you need to do to generate alpha, but there will be times when the element of return due to deviation from the benchmark does not. will not be positive. It is a professional risk to have a conviction, but there are other risks that should offer an additional return premium, such as cases where funds hold a lot of small companies with less liquid stocks (more difficult to buy and for sale).

Plus, expertise in selecting the best companies to take advantage of the health tech trend comes at a price. Sector-specific funds charge their own premium of, in some cases, more than a percentage point above what you would pay for a global tracker exchange-traded fund (ETF). That’s not to say they’re not worth it, but investors should be mindful of base fee and performance structures when choosing funds.

With these important points underlined, there is much to recommend for health technology as a theme for satellite holdings in a diversified portfolio.

Many exciting trends are converging in healthcare technology

Health care is more than the science of medicine. Other themes such as the Internet of Things (IoT) will help meet future needs. An example is Vocera (United States: VCRA), which manufactures smart communications software for healthcare professionals and the devices used to help care for patients.

“As more and more devices are digitized, they can be connected and integrated with each other,” says Nina Deka, senior research analyst at ROBO Global.

Vocera’s software and devices are integrated with more than 140 medical devices, and healthcare providers use Vocera’s portable hands-free kit to communicate with each other and receive alerts from devices connected to patients. Bedside alarms aren’t new, but smart alerts help with effective and preventative care.

“For example, if a patient at risk of falling tries to get out of a smart bed, lowering the bed rail will alert the patient’s nurse to help the patient. », Explains Deka.

The creation of patient profiles via devices and huge amounts of data creates a point of contact with the technological trend of cybersecurity. “With time and investment, healthcare should be able to catch up with other industries, such as financial services, to help ensure data security.” Deka postulates that further adoption of blockchain could also provide a solution, as it can set up reliable sources of information.

This last point is interesting because health applications have been listed by blockchain protocol designers like the Cardano project. “Blockchain offers a huge opportunity to improve the efficiency and transparency of healthcare,” Deka continues.

“We are already seeing examples of supply chain management with companies like IBM, which may offer a way to track drugs, like Covid vaccines from the manufacturing chain to the patient who receives a dose. »Such systems contribute to transparency, security and authenticity; and also supply chain management (a crucial issue we see as the world goes from ‘just in time’ but wants a better option than ‘just in case’ when it comes to matching needs with scarce resources).

The blockchain is also used for accreditation of physicians and may in the future offer patients the ability to control their own medical records and grant permissions. Such innovations could save billions on sprawling but centralized IT projects that are a major cyber risk and point of failure in the supply chain and care management for organizations like the NHS.

Specialized funds have emerged

Several funds are now targeting the confluence of healthcare and related growth themes. Association of Investment Companies (AIC) health sector investment trusts include funds such as BB Health (BBH) and Global Healthcare Trust (WWH) who hold a high proportion of stakes in large pharmaceutical companies. Polar Capital Global Healthcare Trust (PCGH) Also has around 40 percent of assets invested in its top 10 holdings and its sector weightings are around one-fifth in healthcare equipment and one-fifth in pharmaceuticals.

There are also trusts focused primarily on biotechnology such as Biotech growth (BIOG), International biotechnology (IBT), RTW Venture Ltd (RTW) and Syncona (SYNC). Early-stage life science technology is risky (issuers consume money and there is a real risk that clinical trials will fail), but a diverse portfolio gives ordinary investors a more direct game on a certain level. number of companies at different stages of commercial maturity. In addition, the structure of the closed-end fund provides liquid exposure, which is useful as some of the underlying securities may be illiquid.

For diversification through several opportunities in health technologies, including robotics, communication technologies, vaccine science, genomics (the study of gene sequences that could help fight disease), diagnostics and data analysis, there are other options, such as that of ROBO Global. ETF Technology and Health Innovation (HTEC). Another product offering in space, the HAN-GINS Indxx Healthcare Megatrend Equal Weight ETF (WELL), comes from the HAN ETF and GinsGlobal index funds.

A big advantage of ETFs is their lower cost. WELL’s total expense ratio is 59 basis points (bps), or 0.59%. The costs for HTEC are 80 basis points, but until September 2022 a fee waiver by the index advisor will keep the net figure at 68 basis points.

WELL and HTEC are examples of the new generation of semi-active ETFs that benefit from expert oversight of the indices they track. Company size matters for an open fund structure, due to liquidity, but the selection criteria always prioritize innovation and what Deka describes as “purity of earnings”. The index scoring system followed by HTEC requires that a high proportion of income come from healthcare, with technological leadership and disruptive developments also dictating what makes the difference.

WELL is an equal weight ETF with 104 holdings with a minimum market cap of $ 500 million and an average daily turnover of over $ 2 million. A word of warning is that past average daily turnover might not mean much if the markets experience a major liquidity event. But, assuming investors view healthcare technology as a long-term satellite asset, this is the type of potential high-growth investment where a little extra risk in exceptional circumstances can be tolerated under the umbrella. a balanced portfolio strategy.

Companies tracked include companies in the life sciences as well as robotics, medical devices and nanotechnology. Larger positions therefore reflect stocks that have performed well since the index was last rebalanced. In the case of WELL, a genome sequencing company Intellia Therapeutics (NTLA) got ahead at the end of September.

Looking at the data from this one company alone, the benefits of a diversified investment strategy for the industry are clear. Although NTLA shares enjoyed excellent progress over the summer, FactSet data shows that analysts’ consensus estimates for 2021 and 2022 earnings have been revised downward. In addition, sales forecasts for the end of 2021 are lower than the actual figures for 2019. Without knowing much about the company, it would call into question a growth stock.

Sales are the crucial factor in evaluating many businesses in this space. In the case of HTEC, 28.7 percent of portfolio holdings have negative earnings. It is not uncommon for companies on the cusp of growth opportunities to be for-profit, but the path to profitability is vital, which means revenue growth, whether through approved products or partnerships.

Company value (EV, the sum of market capitalization and net debt) divided by sales is the best measure for judging healthcare technology companies. On this basis, the HTEC wallet was cheaper at the end of the third quarter of 2021 (6.4 times) than it was a year earlier (7 times), says Deka. In terms of annualized sales growth, the median of the portfolio was 16 percent in the third quarter and the expected long-term average is 12.9 percent.

Some holdings will move for and against, but growth is slow. Deka argues that the important benefits of diversification are “present when a sub-sector is in vogue and the sub-sectors that are in the background are less risky”.

In addition to this, another positive point is the possibility of targeting more companies in fragmented sectors. “A diverse portfolio helps capture all of the companies that are games derived from the neat innovation that is happening in healthcare,” says Deka. In other words, it means investing in lucrative areas along the healthcare value chain, which involves many exciting ventures.


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