Nathalie Flury & Tazio Storni

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“Pictet evaluates three factors when choosing between companies : the financial fundamentals, quality of the management and market evaluation”

Companies in the health sector have proved to be rewarding long-term investments, outperforming the market since 1995. Earnings per share on health stocks have grown between 10 and 14 per cent annually over the past five years, with an average total return of 19 per cent a year. They are very profitable, generate a lot of cash and pay high dividends – driven as they are by powerful megatrends.

The first of these is demography, with the global population growing from 6 billion in 2005 to 9 billion by 2050. Equally significant is the ageing of the population: life expectancy around the world has risen 20 per cent on average since 1980. By 2050, almost a quarter of the world’s population will be 60 or over, an age-group that uses three times more healthcare than 30-yearolds. The over-60s already consume almost two-thirds of US health spending, while more than half of all new drugs under development are for diseases of the elderly.

Another megatrend is the growing focus on health around the world which is stimulating the search for treatments to tackle unmet medical needs. These include Alzheimer’s, Parkinson’s, cancer and the orphan diseases that afflict tens of thousands of people in developing countries. Even when there are treatments, new products may be needed if they are not very effective or have unpleasant side-effects.

A third megatrend is economic growth, which is making the world richer and allowing people to spend more on their health. In advanced economies, up to 15 per cent of GDP is now spent on healthcare, but even in poorer countries where expenditure is lower, increases in spending boost healthcare revenues because of the numbers being treated. And the rising middle classes in developing countries and emerging economies are increasingly afflicted by the diseases of the developed world. Obesity has become one of the top three global social burdens, with an impact on the world’s economy of USD2 trillion. Eight out of the ten countries with the highest incidence of diabetes are now in the developing world.

Fourth, rising health budgets are focusing interest on cost containment. Top-of-the-range diagnostic equipment in hospitals is often very expensive, though it can still be a good investment if it improves the efficiency of treatment. However, cheaper versions are now being developed for emerging markets and are expanding sales in richer countries to customers such as health centres, sports venues and doctors’ surgeries.

Meanwhile IT is making healthcare administration more efficient, whether it be billing payees or making patient data easily available at all points of treatment. The use of apps to pass data from patients to doctors is growing, while costs are falling rapidly for new diagnostic techniques such as DNA analysis. These megatrends create powerful incentives for innovation which is a key driver for health sector earnings. Meanwhile, pressure to bring much-needed treatments onto the market is speeding up the work of regulators in approving new pharmaceuticals – there at least 20–30 new approvals a year in the US.

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We believe that the most attractive investments in healthcare are companies that bring value added in at least one of four ways:

Innovation: new treatments and processes to address unmet clinical needs;
Quality of life: solutions that deliver better and faster outcomes for patients;
Efficiency: technologies and systems that improve intensity and time of treatments;
Cost containment: reducing the costs of the healthcare system as its activities expand.

When picking investments for the Pictet fund, we invest only in liquid stocks – mostly listed companies in the US, since European providers are often government bodies, mutual insurers or private equity firms. Listed companies are also diversified, selling their products worldwide unlike most other large producers which often focus on their domestic markets.

Pictet evaluates three factors when choosing between companies. The first is their fundamentals – their assets, markets shares of their products and the value they add for the patient. The second is the quality of their management, and the third is their valuation. Finally we carry out bottom-up analysis of each company. For example, at least 50 per cent of their revenues must come from healthcare – food companies with some health products are too diluted. Whether they are in drugs, equipment or services, we want to know that they are really innovative rather than just improving something on the margins. And they should add value for the payers through greater efficacy or efficiency.

Because our fund needs liquidity, it is not a small-cap one. We also need to see data on the efficacy of a company’s products based on human testing. And we talk to doctors and specialists about the quality of the products and whether there are issues such as side effects that would diminish their attractiveness. Today, we have 50–60 stocks in the fund, and follow closely more than another 100. With regular meetings of a distinguished Advisory Board that brings together leading experts, scientists and industry figures from Europe, North America and Asia, we must also try to keep pace with new trends in healthcare.

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