28 Jun, 2019 image

Investing in the healthcare technology revolution

At Robo Global, we believe Robotics, Automation and AI to be the next technological revolution, perhaps the most important in our lifetime and certainly comparable to that of electricity in the early 20th century or more recently that of the internet and mobile. Our research-driven investment strategies enable investors to gain exposure to best-in-class companies across key robotics and AI applications. And investors familiar with the ROBO index have taken note that companies leading the charge have significantly outperformed equity markets in recent years.

Earlier this week, we revealed our Healthcare Technology & Innovation Index (HTEC), which seeks to capture the growth and returns opportunity presented by the convergence of robotics, machine intelligence and life sciences. While the list of innovation is vast, it includes many that seemed like science fiction just a few years ago.

If you think about it, we now have more than 5,000 robots around the world’s hospitals, assisting surgeons perform prostate and gynecology procedures. We have AI that can help physicians increase the accuracy of their diagnosis when reading medical imaging and biopsy results. From 3D printed implants for organ and bone transplants, to miniature heart pumps that can be inserted through the femoral artery and wearable devices that measure and deliver your insulin seamlessly. And perhaps most importantly, we now have affordable gene sequencing technology, which has opened the door to an entirely new medical approach when it comes to detecting diseases at very early stages and to develop custom treatments that are tailored to individual needs. The first gene-therapies have just been approved by the FDA and the number of clinical trials to find a cure for cancer using genomic data has more than doubled in the past two years.

There could not be a more exciting time for doctors, patients, and investors in healthcare technology. This transition to a technology-enabled healthcare is still in the early stages.

Note: As of 31 May 2019. Back test prior to April 2019.

We anticipate that technology will profoundly transform the healthcare industry, creating immense disruption in which stale businesses will disappear and innovation will offer new profit opportunities. Winners will invent and implement technologies that match the right care at the right time, place and cost. There will also be huge rewards for rapid growth and consolidation due to the economies of scale that are integral to technology solutions.

The market is telling us something important is happening: VC funding of US healthcare companies has tripled from $10B in 2011 to $30B in 2018, of which 32% in digital health. And the financing of AI companies in healthcare nearly doubled in 2018, to $2.3B.

The public companies at the forefront of the healthcare revolution have started to significantly outperform global equities. A back test of the ROBO Global Healthcare Technology & Innovation Index (HTEC) shows annualized total returns of over 23% and 18% in the three and five years ending in 2018. Today, the combination of exponential gains in performance capabilities and rapidly declining cost curves is creating a key inflection point and finally bringing medicine into the 21st century.

HTEC combines the results of our extensive research efforts with the discipline and quantitative aspects of index investing to provide exposure to best-in-class companies, small and large, that are leading the global healthcare technology revolution in nine major areas: robotics, lab automation, data analytics, genomics, precision and regenerative medicine, diagnostics, instruments, and telehealth. This research-driven index portfolio of over 80 companies is focused on the technology and market leaders that are helping transform healthcare along four main lines:

  • Shifting the model from caring for the sick to preventing, predicting, and eradicating disease, using advancements such as AI-powered diagnostics, remote monitoring through connected devices, and genomic analysis, which has opened the door to the detection of diseases at very early stages.
  • Enhancing physicians’ accuracy and productivity with a wide range of automation and robotics technologies that promise to address the looming shortage of physicians, while also reducing human errors and improving patient outcomes.
  • Improving the efficacy of therapies by enabling the shift from a one size-fits-all approach to one of custom therapies tailored to individual patients.
  • Lowering costs in one of the large economic sectors that saw the least productivity gains in the past decade and also remains one of the least digitized.

We evaluate and score companies for technology and market leadership, as well as revenue and investment exposure. Those with the highest “HTEC scores” that also pass ROBO Global’s Environmental, Social, and Governance (ESG) policy requirements are selected as index members. We review suitable companies’ HTEC scores based on ongoing research, engagement with company management teams, and market developments; and we reconstitute and rebalance the index to modified equal weights on a quarterly basis.

The resulting portfolio is significantly different from typical healthcare funds, offering a high active share rather than a broad equity index. In fact, the overlap with world equity indices is less than 2%. The index also has very limited exposure to the traditional pharmaceutical industry, which we expect to be significantly disrupted and typically accounts for over 40% of global healthcare funds. Instead, HTEC offers much higher exposure to technology hardware and software providers, life science tools companies, as well as biotechnology companies involved in genomics and precision medicine. For investors who recognize the coming impact of the healthcare revolution, HTEC may indeed be just what the doctor ordered.

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