The global healthcare sector is undergoing transformation in the face of demographic change, government regulation, scientific advance and therapeutic innovation. We have been further strengthening our capacity to identify sustainable investment opportunities in the sector.

The sector accounts for a significant proportion of our Global Opportunities strategy, our high conviction, low turnover unconstrained equities strategy that invests in companies positioned to benefit from the transition to a more sustainable economy. Opportunities are analysed using the Impax Sustainability Lens, our proprietary tool we use to identify sustainability solution providers and companies with fragile business models that are vulnerable to developing industry dynamics and social trends.

Below, we explain how healthcare fits into Impax’s investment philosophy.

A global healthcare industry ripe for disruption

Today’s global healthcare system is dominated by companies pursuing what we believe are unsustainable business models:

  • healthcare providers have failed to constrain drug costs;
  • new therapies are launched with limited added benefit to patients, dragging down industry returns on R&D spend;
  • private hospitals are, by and large, bloated and wasteful institutions, yet continue to charge exorbitant prices in often-monopolistic contexts.

No sign of the curve bending
US healthcare spending as a share of gross domestic product

Source: Federal Reserve Bank of St Louis

The healthcare paradigm is under pressure from declining affordability as demographic trends and poor lifestyle management contribute to a rise in chronic disease and associated morbidity.

Losing ground
Service price changes compared with wages*

Source: Federal Reserve Bank of St Louis
*relative growth – rebased to 100 = 2001

Many of today’s most costly end markets are coming under the spotlight, to the detriment of incumbents. For example, the US spends almost twice as much each year on diabetes alone than is spent globally on all rare diseases combined, despite drugs for these latter conditions often being among the most expensive available, and where patients have limited or no other options.

Many of the most commonly prescribed drugs have been subject to price increases of 100-200% over the course of their lifetimes, while providing the same (often minimal) clinical benefits.

Big Pharma is no longer driving innovation, instead operating predominantly as a marketing machine for in-licensed technology and, in the US market in particular, exploiting pricing power.

To become sustainable, the healthcare system must achieve more meaningful results for a greater number of patients in a more cost-efficient manner. Those providers creating greater complexity, inefficiency and cost are at high risk of disruption. This can take many forms – new regulation, price interventions and competition, lifestyle adjustments and prevention, or functional cures.

A holistic view across all healthcare sectors and policy stakeholders is required in order to integrate these moving parts into a successful investment strategy.

A sustainable investment opportunity

We aim to invest in the enablers of a more sustainable healthcare industry. Some of the best opportunities and most sustainable business models include preventative care and early detection (diagnostics, imaging and analysis), cost-efficient innovation (specialist R&D outsourcing) and enablers of improved healthcare system efficiency (transformative treatments reducing significant future costs).

Fundamentally, we are looking for companies that facilitate increased longevity and an improved quality of life, or which enable a reduction in overall healthcare system costs.

  • Investment in innovation will be rewarded
    While Big Pharma is stepping back from investment in internally originated R&D, innovation is strong amongst specialist biotech firms. We focus on first identifying what constitutes innovation by therapeutic area – in terms of efficacy, safety and net-cost benefits – and prefer to invest directly in these specialists.

    A growing emphasis on detection and prevention presents opportunities in advanced clinical and molecular diagnostics as well as in imaging tools, both hardware and software.

    Equity investment in defensible innovation will, we believe, generate attractive returns, either through organic growth or via acquisition.
  • Opportunities in research outsourcing
    As scientific understanding inexorably develops, what was considered a single disease 10 years ago may be viewed today as a range of sub-divided diseases.

    The age of the ‘blockbuster drug’ is therefore receding and the rise of personalised medicine – with therapies tailored to an individual patient – requires a broader suite of discrete solutions, where each will generate significantly less revenue than the multi-blockbusters of the past.

    This implies the need for increased R&D productivity in an ever-more specialised fashion. Whether in the better sourcing of clinical trial sites or molecule selection in the laboratory, there will be a trend towards outsourcing of critical research and development functions.

    We anticipate significant growth in centralised outsourced R&D operations that can exploit economies of scale to provide high-quality pre-clinical services and clinical trial administration, in turn delivering higher R&D productivity and lower costs.
  • A global investment opportunity
    The healthcare universe is dominated by US companies and the US healthcare sector, which is characterised by its own particular circumstances. However, emerging markets with healthcare systems at varying degrees of maturity allow different business models and investment profiles to flourish, and present different suites of opportunities.

    For example, a business model which fails to deliver in Europe may be highly effective in China, due to the vast differences in existing healthcare infrastructures, demographics and reimbursement landscapes.

Successfully investing in healthcare

Investing in the healthcare sector is, to some extent, a departure from the focus on physical environmental constraints that has characterised much of our investment activity to date.

However, identifying potential opportunities uses similar skills and techniques: understanding how demographic trends are set to stress existing business models; analysing the investment implications of potential regulatory and policy shifts; keeping a close eye on value; and identifying high-quality management teams. In addition, the healthcare sector offers additional diversification, helping to ensure consistent portfolio returns over time.

For more information on our views on the healthcare sector and to learn more on our Global Opportunities strategy, please email clientservices@impaxam.com

Chris Eccles

Research Analyst, Associate Director

Chris Eccles is a research analyst who specialises in testing and regulatory affairs. He researches stocks globally and focuses on the Healthcare sector.

Chris joined Impax in March 2019. He started working in the financial industry in 2011 as a research analyst at Morgan Stanley where he focused on European large-cap pharmaceuticals. In 2014, he became a partner at the hedge fund Kola Capital where he worked as a global equities analyst for three years before moving to Stifel in 2017 to work as a Healthcare Specialist.

Chris achieved an MA (Oxon) Physiological Sciences First Class Honours, from the University of Oxford.

Recent blog posts

The sustainable healthcare opportunity

The global healthcare sector is undergoing transformation in the face of demographic change, government regulation, scientific advance and therapeutic innovation.

21 Nov 2019
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