The global healthcare sector is undergoing transformation in the face of demographic change, government regulation, scientific advance and therapeutic innovation.
The sector accounts for a significant proportion of the Pax Global Opportunities Fund, our high conviction, low turnover global equity strategy that invests in companies positioned to benefit from the transition to a more sustainable global economy. Opportunities are analyzed using the Impax Sustainability Lens, our proprietary tool for identifying sustainability solution providers as well as companies with business models that are vulnerable to developing industry dynamics and social trends.
Here’s how healthcare fits into the Fund’s investment philosophy and approach.
Today’s 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 research and development (R&D) spend; and 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
U.S. healthcare spending as a share of gross domestic product
The healthcare paradigm is under pressure due to declining affordability, as demographic trends and poor lifestyle management contribute to a rise in chronic disease and associated morbidity.
Service price changes compared with wages*
Many of today’s most costly end-markets are coming under the spotlight, to the detriment of other important end-markets. For example, the United States spends almost twice as much annually 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 percent 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 U.S. 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, which could 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.
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 those that enable a reduction in overall healthcare system costs.
While Big Pharma is stepping back from investment in internally originated R&D, innovation is strong among specialist biotech firms. We focus first on identifying what constitutes innovation by therapeutic area — in terms of efficacy, safety and net-cost benefits. We 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.
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 personalized 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 specialized fashion. Whether in the better sourcing of clinical trial sites or molecule selection in the laboratory, there will be a trend toward outsourcing of critical research and development functions.
We anticipate significant growth in centralized 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.
The healthcare universe is dominated by U.S. companies and the U.S. healthcare sector, which is characterized 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 that fails to deliver in Europe may be highly effective in China, due to the vast differences in existing healthcare infrastructures, demographics and reimbursement landscapes.
For us, identifying potential opportunities in the healthcare sector involves: understanding how demographic trends are set to stress existing business models; analyzing the investment implications of potential regulatory and policy shifts; keeping a close eye on value; and identifying high-quality management teams.
Learn more about the Pax Global Opportunities Fund.
Equity investments are subject to market fluctuations, the fund’s share price can fall because of weakness in the broad market, a particular industry, or specific holdings. Emerging market and international investments involve risk of capital loss from unfavorable fluctuations in currency values, differences in generally accepted accounting principles, economic or political instability in other nations or increased volatility and lower trading volume. The Pax Global Opportunities Fund is new and has a limited operating history.