Increasing life expectancy, technological advances and demand for new drugs are presenting opportunities in healthcare, writes Peter Askew, co-manager of the T. Bailey Growth fund
‘Die another day' would perhaps be an apt heading for this piece. Not because it is a critique of an old Bond film, rather a reflection on how we are all living longer and the implications that has for healthcare, savings and, not least, investment opportunities.
Life expectancy continues to rise in the UK and around most of the globe. It is a meaningful demographic trend and one that alters individuals' concepts of retirement and lifestyle.
According to research published in the Lancet in March, life expectancy in the UK has increased by 4.2 years to 79.9 years since 1990. By the end of 2013, it was estimated to be 80.3 years. Those thinking of retiring at 60 or 65 now need to consider how they will fund 15 to 20 years of retirement.
This increase in life expectancy is, in part, down to healthier lifestyles, with better diet and more exercise reducing the incidence of heart disease, despite increased warnings about obesity. Progress in medicines and healthcare technology are also playing a significant role.
We are currently on the cusp of changing the way we look at healthcare: moving from a sickness-based approach - where you become ill and are then, hopefully, cured - to solutions, where there is a far greater emphasis on monitoring and prevention. This is potentially a game-changer that could result in a meaningful reduction in the costs of healthcare.
Much of this change is centred on technology. A smartphone app monitoring blood sugar will allow us to see the impact of that doughnut, although we may choose not to! At the start of this century, the first human genome sequence cost $1bn. Just over a decade later, that same sequencing is available for $1,000. Scientists have a better understanding of disease at the molecular level and diseases can be targeted more easily.
It also means that, while today we take generic drugs that may affect different people in varying ways, looking ahead, medicine will become more personalised.
One previous hindrance to advances in healthcare was the glacial pace of drug approval by the Federal Drug Agency (FDA) in the US. Under President Obama, that process has accelerated, no doubt in concert with his Affordable Healthcare Act - aka Obamacare - and FDA new drug approvals have reached a 13-year high.
An increased lifespan will mean working longer, assisted by medical advances that should keep us fitter despite our advancing years. Nevertheless, it will pay to save for retirement and beyond, which may make individual investors extend their investment horizon.
In such an environment, including healthcare funds in one's investments for the future seems a logical approach. Some will opt for high-octane biotechnology funds, which have done very well and are a less binary option than direct investment in biotech stocks.
We prefer to take a broader approach, one example being the Polar Global Healthcare Opportunities fund. This holds biotechnology investments but alongside pharmaceuticals, medical devices and healthcare services.
Importantly, like the majority of the funds we prefer, it does not slavishly adhere to a benchmark, such as the MSCI World Healthcare index. Therefore, you get the managers' best thinking and are not drawn into large relative allocations to big pharmaceutical stocks just because they represent a large part of the index.
Research and development budgets at these big pharmaceutical companies have shrunk in preference to acquiring smaller businesses that have developed the drugs, often at large premiums. Roche's strategic partnering with Molecular Partners in December is another example of how large pharmaceutical companies are boosting drug development.
We see no reason to expect a slowing in the technology-assisted drive to discover new drugs targeting specific illnesses.
The economic reality of large budget deficits and an aging population will force governments to seek innovative ways to address the rising cost of healthcare. Just delaying the onset of Alzheimer's by five years would, according to the Alzheimer's Association, save close to $500bn by 2050.
In this context, we believe that, even after a strong run in 2013, the healthcare sector continues to offer considerable long-term potential for investors.
Paul Bruns and Elaine Parkes
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