Friday 11 June 2021
Thematic Equity - Medtech : What are its post-covid prospects ?
CPR AM has been exposed since 2009 to the healthcare story, first through the prism of the ageing of the population with its Silver Age strategy, and, since 2018, via medical technologies. MedTech is disruptive in the sense that it offers and promotes new solutions meeting new needs and that it will have a long-term impact on our lives and our society, for whom wellbeing, quality of life and cost-reduction have become essential. We now manage more than 700 million euros in our MedTech strategy and the CPR Invest – Medtech I-Acc fund has achieved a net return of 22.6% year-onyear.
Interview with Thomas Chavet.
COULD YOU TELL US A LITTLE ABOUT CPR INVEST – MEDTECH?
With CPR Invest – Medtech, we offer our clients access to an entire technical and technological medical ecosystem worldwide, at every stage of healthcare – prevention, diagnosis, intervention, treatment and follow-up.
Medical technology is driven by ongoing innovation as new technologies and new uses emerge, such as AIbased diagnostic aides, robotic surgery, telemedicine, and online medical follow-up tools for home use. These new technologies are essential for improving everyone’s health and for saving lives, extending lifespans and, more generally, reinventing healthcare systems, while reducing overall costs. Cost savings benefit both public healthcare systems and patients.
The MedTech investment process is based on identifying the most promising medical technology companies through a hybrid top-down/bottom-up approach within a universe in which poor ESG practices and average or serious controversies have been filtered out. Companies are researched on their fundamentals, and we assess their medium- and long-term prospects, as well as the contribution of factors to asset risk.
This approach aims to keep up with sector trends while ensuring that the fund is ideally positioned for various market phases. MedTech sub-sectors are all driven by their innovation objectives but go about achieving those objectives in very different ways. We construct our portfolio to exploit the diversification of this universe and generate returns through controlled timing. Returns are driven partly by the manager’s ability to determine the sub-sector with the greatest potential, based on market conditions.
COVID-19 HAS CAST THE SPOTLIGHT BACK ON THE HEALTHCARE SECTOR. DO YOU THINK THIS IS STILL THE PLACE TO BE?
Covid-19 is a temporary driver destined to become structural, driven by long-term trends that are already with us. The medical technologies industry has been a key player during the pandemic. MedTech actors have sought to improve the way in which their devices are used. MedTech companies intend to continue integrating new features by accelerating and expanding technological capacities that will then become standard. The CEO of Abbott Laboratories believes that “MedTech companies can truly reduce response times, meet challenges in logistics and in-person meetings, and ultimately help lower healthcare costs”. Likewise, the CEO of Boston Scientific says that “the company has taken advantage of the crisis to accelerate its investments and digital capacities in fields such as clinical trials, customer involvement, mobile solutions, medical education and remote assistance”.
Moreover, the demographic context – population growth and ageing – points to a boom in medical technology. There are likely to be more than 10 billion of us in 2050, based on the UN’s latest estimates. Meanwhile, average life expectancy has almost doubled in one century, from 34 to 72 years. New pathologies have emerged and patient follow-up is now a long-term undertaking, particularly in the case of chronic pathologies, which, moreover, have been exacerbated by urbanisation, with its more sedentary lifestyles, poor diets, and pollution. According to the World Health Organisation, chronic diseases are the cause of 63% of global deaths and affect one third of the French population, with an almost 17% increase in case numbers over the next 10 years. On top of that, an emerging middle class in emerging market economies aspires to better access to healthcare. More broadly, the medical technologies sector is focused on research and development. In devoting 8 % of its revenues to R&D (more than three times as much as the MSCI World average), medical technologies create ideal conditions for robust profitability and growth.
Meanwhile, mergers and acquisitions are a structural driver for the sector allowing it to adjust very rapidly to new fields, new technologies and new needs.
Large companies are seeking to expand their product lines by acquiring small, innovative companies that do not possess sufficient marketing wherewithal to compete with their larger peers or to sell their own products efficiently. The pace of M&A was slowed in 2020 by the pandemic, and the market expects deals to rebound in 2021. In the third quarter of 2020 alone, deals amounted to 26 billion euros, far more than the 2 billion total euros of the first quarter of 2020. Companies are armed with record financing capacity of about 500 billion dollars. Companies’ performances should improve as acquisitions resume and the pandemic’s impact recedes.
Acquisitions made in the two first months of the year: Artificial intelligence provides enhanced prognoses of pathologies and at a very early stage, through digitalisation, miniaturisation, teleconsultations, liquid biopsies, and so on. A huge amount of research is under way, with spectacular progress expected, and exciting prospects.
WHICH MEDTECH SEGMENTS OFFER STRONG SHORT- AND MEDIUM-TERM POTENTIAL?
To grasp the full potential of MedTech, it is important first to identify Covid-19’s impact on 2020. For the pandemic can be split into two separate phases. The first was characterised by a lack of vaccines and, more importantly, by poor long-term vision. The second phase featured announcements by various pharma groups of future vaccines and distribution of those vaccines. During the first Covid-19 waves, MedTech companies were mainly focused on virus detection. The supply of equipment obviously came under the spotlight and thus achieved better results.
In the second phase, MedTechs took a different strategic approach. Sectors whose core business was vital saw a strong resumption in activity. One example is heart surgeries that could not be postponed indefinitely, in contrast to dental treatments or hip replacements, for example. The global market for cardiovascular devices is expected to have expanded by an annual average of 6.6%, from 42.61 billion dollars in 2019 to 71.05 billion dollars in 2027. The growing prevalence of cardiovascular diseases is one of the key factors behind market growth.
Lastly, a new paradigm has emerged, in which companies that achieved good results during the Covid-19 pandemic will remain essential (such as in diagnosis), but also in which companies that took a hit and whose activity is vital will return to pre-crisis levels (cardiology, among others). As we already noted, testing will remain essential for as long as vaccination campaigns last. Living with testing will be the norm, especially that it has become less expensive and more widely available. Improved technology (with smartphone apps for results and a negative badge) and decentralised testing infrastructures will help increase testing frequency and move it closer to the consumer.
MedTech companies boosted by Covid-19 will thrive in the coming years, along with those that, on top of the public health crisis, will promote and benefit from the emergence of new technologies. Tomorrow’s medicine is taking shape today in MedTech labs and will look nothing like yesterday. CPR Invest – MedTech is a way to take part in this formidable growth adventure.
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By Thomas Chavet, Investment Specialist - CPR AM