At GAM Investments’ Weekly Investment Meeting held on 10 July 2019 the speaker was Christophe Eggmann, who discussed the latest developments in healthcare.
In terms of positioning at the country and sub-sector level, our favoured areas remain the US and biotechnology. We continue to focus on innovation and the US is where we see the best opportunities – having recently returned from a one-month US business trip to attend company meetings, the higher levels of innovation by local companies appears to fully justify our extensive research. Similarly, we also see value in mid and small-cap businesses where we are able to invest in companies which are at different stages of developing their innovations and constitute potential takeover targets. We feel investors in the sector would be wise to look towards more defensive businesses in the run-up to the 2020 US presidential election – as we experienced in 2016, speculation over limits on drug pricing and industry regulation in an election year has the capacity to spook investors.
Given our focus on innovation, the two major themes we are most interested in are gene therapy and digital health. We view the former as the greatest industry development in the last 30 years and, as recently as five years ago, it was considered more akin to science fiction than a practical therapeutic solution with the potential to revolutionise the healthcare industry. The latest stage of development has been to find new payment models that are patient and system friendly. Clearly, the major difference between gene therapy and traditional therapeutic solutions is the time angle. Given that the former is a therapeutic cure, rather than an ongoing (‘for life’) treatment, the upfront costs are much greater (something insurers are not currently in a position to reimburse) but also significantly cheaper in overall terms. The other differentiation is that the potential outcomes of gene therapy are clearly polarised (is the patient cured or not?) and this means the system is more performance and value based than traditional drug therapy, which simply treats the symptoms of the disease. In terms of cost analysis, gene therapy can also be assessed on the basis of four different criteria – quality of life improvement, extension of life, societal value and overall cost reduction in comparison to the ‘for life’ cost of traditional therapies.
Digital health is also very interesting, especially in its application of machine learning and artificial intelligence. A very useful example lies in the detection of oHCM, which is a comparatively rare, but heritable, disease of the heart muscle that increases the risk of heart failure, stroke and sudden death. In terms of prevalence, the disease affects approximately 1 in 500, suggesting that there are around 600,000 sufferers in the US and the previous diagnostic rate was, at best, around 20%. The digital approach involves incorporating a non-invasive optical sensor into commercial smart watches to detect blood volume at the surface of the skin. In trials, this automated, machine-learning classifier detected oHCM patients with a 95% sensitivity and a 98% specificity.
Innovation remains the most important driver of growth and value creation; science and the product pipeline continue to progress at a rapid pace. M&A activity has picked up as we anticipated; we have seen two cash and stock deals of a high transactional value so far this year but also three much smaller all-cash transactions, which reflect the trend of large-cap companies seeking to buy innovation through acquisition-based expansion.
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