Healthcare infrastructure is an important theme for us. The growing demand for healthcare infrastructure is driven by the trend towards an ageing population globally, leading to a greater need for healthcare spending over the coming decades.
Demographics and modern lifestyle changes are increasing healthcare system costs. This combined with increasing regulatory pressure and complexity in product development are creating secular themes, challenges and opportunities within the sector. To help identify these, part of our fundamental analysis is centred on three long-term mega-trends: Demographic Changes, Future of Technology and Resource Scarcity.
Our approach to investing in healthcare is contextualised by our Long-Term Unconstrained (LTU) philosophy, and the companies we invest in to express these views. In this report, we discuss our preference for life science tools (LST) and medical technology (Med-Tech), relative to pharmaceutical and biotechnology companies, from a fundamental and thematic perspective. Taking a long-term approach and focusing on companies with high barriers to entry and dominant market positions, in our view leads to opportunities to own sustainable high growth and return businesses with low disruption risk and strong pricing power.
These companies should compound cash flows at attractive rates, whilst having lower risk from leverage or poor governance.
Healthcare infrastructure is an important theme for us. The growing demand for healthcare infrastructure is driven by the trend towards an ageing population globally, leading to a greater need for healthcare spending over the coming decades.
Demographics and modern lifestyle changes are increasing healthcare system costs. This combined with increasing regulatory pressure and complexity in product development are creating secular themes, challenges and opportunities within the sector. To help identify these, part of our fundamental analysis is centred on three long-term mega-trends: Demographic Changes, Future of Technology and Resource Scarcity.
Our approach to investing in healthcare is contextualised by our Long-Term Unconstrained (LTU) philosophy, and the companies we invest in to express these views. In this report, we discuss our preference for life science tools (LST) and medical technology (Med-Tech), relative to pharmaceutical and biotechnology companies, from a fundamental and thematic perspective. Taking a long-term approach and focusing on companies with high barriers to entry and dominant market positions, in our view leads to opportunities to own sustainable high growth and return businesses with low disruption risk and strong pricing power.
These companies should compound cash flows at attractive rates, whilst having lower risk from leverage or poor governance.
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Demographics and modern lifestyle changes are increasing healthcare system costs. This combined with increasing regulatory pressure and complexity in product development are creating secular themes, challenges and opportunities within the sector.
Focusing on sustainable quality growth healthcare companies
Our investment philosophy seeks to invest in companies with prospects of high returns on invested capital (ROIC), attractive revenues, earnings and cash-flow growth.
We believe healthcare companies operate within several structural themes that enable the best managed and positioned companies to generate superior growth and ROIC. High levels of complexity and regulation around products and services yield barriers to entry in the form of domain expertise, intellectual capital, high switching costs, and network effects. This creates the foundation for companies in the healthcare space to maintain a structural advantage.
Organic re-investment creates a virtuous circle of innovation and economies of scale. As an example, Illumina, the market leader in next generation sequencing (NGS) within genomics, not only has the broadest, cheapest and most reliable offering of genomics instruments, but it has also built a hardware and software ecosystem across the entire sequencing workflow.
Industry practitioners (researchers or bioinformaticians1) use Illumina’s ‘operating system’ for both training and developing new research and products. Which they in turn can help improve, and Illumina can further automate. For example with artificial intelligence (AI), some of the data interpretation work saves its customers, such as large research labs or biotech companies, time and expense.
Generally, we do not find attractive stock ideas in biotechnology and pharmaceuticals due to regulatory, political, litigation, and pipeline risks, which can be difficult to forecast and/or assess through a fundamental lens. Historically egregious price increases for limited incremental innovation have drawn substantial political attention.
This has been sharpened by healthcare systems facing extreme cost and utilisation pressures, worsened by the Covid-19 crisis. This increased attention further shifts the focus by payors on reimbursement; put another way, pharmaceuticals are incrementally a price-taker, rather than a price-maker, as demonstrated by the recently enacted Inflation Reduction Act (IRA) in the USA.
This brings direct price controls to bear in drugs sold under US Medicare, although as usual, pharmaceuticals are litigating against these efforts.
Focusing on sustainable quality growth healthcare companies
Our investment philosophy seeks to invest in companies with prospects of high returns on invested capital (ROIC), attractive revenues, earnings and cash-flow growth.
We believe healthcare companies operate within several structural themes that enable the best managed and positioned companies to generate superior growth and ROIC. High levels of complexity and regulation around products and services yield barriers to entry in the form of domain expertise, intellectual capital, high switching costs, and network effects. This creates the foundation for companies in the healthcare space to maintain a structural advantage.
Organic re-investment creates a virtuous circle of innovation and economies of scale. As an example, Illumina, the market leader in next generation sequencing (NGS) within genomics, not only has the broadest, cheapest and most reliable offering of genomics instruments, but it has also built a hardware and software ecosystem across the entire sequencing workflow.
Industry practitioners (researchers or bioinformaticians1) use Illumina’s ‘operating system’ for both training and developing new research and products. Which they in turn can help improve, and Illumina can further automate. For example with artificial intelligence (AI), some of the data interpretation work saves its customers, such as large research labs or biotech companies, time and expense.
Generally, we do not find attractive stock ideas in biotechnology and pharmaceuticals due to regulatory, political, litigation, and pipeline risks, which can be difficult to forecast and/or assess through a fundamental lens. Historically egregious price increases for limited incremental innovation have drawn substantial political attention.
This has been sharpened by healthcare systems facing extreme cost and utilisation pressures, worsened by the Covid-19 crisis. This increased attention further shifts the focus by payors on reimbursement; put another way, pharmaceuticals are incrementally a price-taker, rather than a price-maker, as demonstrated by the recently enacted Inflation Reduction Act (IRA) in the USA.
This brings direct price controls to bear in drugs sold under US Medicare, although as usual, pharmaceuticals are litigating against these efforts.
Sources
1Source: An individual that develops methods and software tools to understand biological data.
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