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29/12/2014
Daniel Mahony of Polar Capital looks at healthcare's investment potential.

The ageing population is putting pressure on healthcare systems globally, by 2050 more than a fifth of the global population will be over 60 years old. Without a radical overhaul of existing healthcare infrastructure and systems it will be difficult to meet growing healthcare needs and demands. Change has already begun and this is creating investment opportunities for investors.

The way that healthcare is delivered is transitioning away from the historical fee for service model to a system where excellence is rewarded and patients are empowered. The successful companies will be those that adapt to this changing environment.

Structural change is creating investment opportunities in two areas: innovators and consolidators. The innovators tend to be smaller firms launching new drugs and technologies while the consolidators are those that are strengthening their core franchises, standardising processes and creating economies of scale.

While high profile deals in the pharmaceutical sector such as Pfizer’s approach to AstraZeneca and AbbVie’s bid for Shire have grabbed the headlines, there is consolidation occurring across the entire healthcare value chain.

In the US hospital sector, the $30bn hospital company HCA is looking to acquire smaller hospital chains that are struggling to make capital investments in information technology and lack the purchasing power of a larger organisation. The US managed care industry continues to consolidate with ten insurance companies now responsible for 80 per cent of all health insurance plans in the US. Moreover, one of the largest deals announced this year is the proposed merger of Medtronic and Covidien that will create a $100 billion-plus giant in the medical device and supplies sector.

Consolidation will be a key part of making healthcare systems more efficient. For example, Zimmer’s proposed acquisition of Biomet will create a dominant player in orthopaedics, the combined company will control 40 per cent of the global knee replacement market and 25 per centof the hip replacement market. As the largest player in the market, the new Zimmer will start to rationalise product lines and standardise surgical techniques and processes across its hospital customer base. As a result, it will take market share and hospitals will improve efficiency and reduce their costs.

Technology is also playing a part in mapping out the future of healthcare, patients are starting to become better informed about symptoms and also the treatment and level of care they should expect. With the advent of monitoring via a mobile phone or watch, the demand for enhanced technology and monitoring will come from the consumer and not from the medical or healthcare profession.

Technology is not only helping the consumer but also driving areas of research and development in therapeutic advancements such as biotechnology. Bristol-Myers, Merck, Roche and AstraZeneca are close to launching new drugs that manipulate the body’s immune system to help fight cancer while biotechnology companies like Vertex and Summit are developing new treatments for genetic diseases such as cystic fibrosis and muscular dystrophy, respectively.

For investors, healthcare stocks may have rallied but the sector is currently not expensive and diversification is available. There are over 3,000 global healthcare companies from household names like Johnson & Johnson to the small biotechnology companies. One thing to be aware of is that investing in healthcare requires a longer time horizon, given the long development times and product cycles, but staying abreast of new breakthroughs and innovations creates an opportunity for investors to profit.

Daniel Mahony is healthcare fund manager at Polar Capital

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