The healthcare market is booming: each year, healthcare spending reaches $8.5trn worldwide, “a figure that has doubled in 20 years,” according to Louis Porrini at the asset management firm La Financière de l’Échiquier (LFDE). In the United States, the share of GDP spent on health reached 19.7% in 2019. “50% of the world’s population has no access to basic health care and every year, according to the WHO, 100 million people fall into poverty because of the cost of this care.”
One of the key trends in the market is the pursuit of healthcare spending. “If the benefits of the solutions provided by professionals exceed the cost to society, the question of price comes second,” Porrini said, citing the case of vaccines against covid as an example.
To take advantage of this trend, the fund has decided to favour companies that have a concrete impact on access to health. It bases its analysis on four criteria: availability, geographical and financial accessibility, and acceptability.
Speaking of availability, Porrini referred to “innovative biological medicines,” targeted therapies, immunotherapy and gene therapies, as well as promising new medicines, to treat diseases for which no treatment is yet available. The market was estimated to be worth $303bn in 2020.
The theme of accessibility refers to telemedicine, a booming sector that was estimated to be worth $88bn in 2022. That refers to screening, treating patients remotely and monitoring patients through virtual consultations, wireless biosensors, etc. “This takes the burden off healthcare facilities and speeds up treatment, especially for people who are isolated.”
The theme of affordability refers to in vitro diagnostics. “These diagnostics account for between 2% and 3% of global healthcare expenditure, even though they are essential for medical decision-making.” In 2020, this market was worth $80bn.
Acceptability targets the innovative medical device sector, such as wireless insulin pumps, bionic prostheses and other kit. In short, new devices to improve the comfort and uptake of medical treatments, “a $432 billion market in 2020.”
The initial investment universe focuses on international healthcare stocks with a market capitalisation of more than €50m and a turnover of more than €10m. That is a universe of approximately 2,100 companies. After applying an initial series of ESG filters, followed by an impact filter measuring the contribution to improving access to health--at least 20% of each company’s turnover must contribute to one or more of the four themes--the remaining 150 or so companies are put through the mill of fundamental analysis to arrive at a portfolio of around 40 stocks. Only innovative companies remain on the list.
End of the covid parenthesis
While he is less negative on the generics sector--“an extremely competitive sector where added value is low”--Porrini is very positive on the biodrugs sector, which uses a biological source as the raw material for the active ingredient it contains. “Messenger RNA is a biomedicine. It is a molecule, in this case RNA, that will transmit genetic information to a cell to force it to act. Messenger RNA is the pinnacle of innovation.”
The sector’s valuations are high, especially for the innovative companies that are the core of the portfolio. Valuations have been boosted by the fall in interest rates over the past 20 years. Valuations have returned to their pre-covid levels after having fallen sharply. According to Porrini, we are witnessing a correction in the trajectory of covid-related revenues. That trajectory was poorly anticipated by the market and investors, which led to a certain amount of “confusion” about the real value of companies. “For some companies, the revenues generated by covid could represent up to 40% of turnover.” This confusion will dissipate as management “cleanses” these revenues from their outlook for the coming years. Somewhere a parenthesis is being closed and the market is returning to the fundamentals that should be the added value of access to health and the differentiation between companies in terms of innovation.
When asked whether companies in the sector have been destabilised by the current inflation and rising interest rates, Porrini replies that “inflation is not the most worrying thing.” The rise in the price of raw materials and energy has relatively little effect on the sector. The inflation that worries him and affects innovative companies is salary inflation. “They need very high-flying engineers who are expensive. And generally speaking, there are shortages of skilled workers everywhere. To solve this problem, you have to pay people better.”
Read the original French version of this interview on the site