Insights

Implications of COVID-19 to the Digital Health Theme

Interview with Pascal Mercier about the current implications of the COVID-19 crisis to the Digital Health theme.

What is the main advantage offered by the health care sector at this moment in your view?

We believe technological disruption of the health care sector is happening at a fast pace, and over the next 5 to 10 years advances in technology will transform every aspect of health care from R&D (research and development), through innovative treatments and therapies, to hospital efficiency, early-stage diagnostic systems and bio-monitoring systems designed to maintain our state of healthiness and avoid becoming sick in the first place.

We believe the digitalization of health care will remain a strong structural growth theme in the aftermath of the current pandemic crisis. The technological disruption of the health care sector has been one of our strongest investment convictions over the last two years, and it is still one of our top convictions for the long term.

What may be different after the COVID-19 crisis?

There are many reasons why companies are gradually investing in the digital transformation, such as improving their ability to adapt to changing customer needs, increasing operational efficiency, and boosting profits.

The fact that so many employees must now, due to the COVID-19 pandemic, work from home, will trigger greater investments into cybersecurity, automation, online education, telehealth and telemedicine. Investments focused on digitalization of healthcare were already attractive before the current crisis due to their broad accessibility and affordability, but the current crisis had only added to their appeal. Consequently, we see the crisis as an inflection point for the faster adoption of digital technologies, accelerating the digital transformation of many sectors such as health care.

As an example, we saw a surge in Teladoc’s “virtual doctor visits” in the US over the last month after the White House announced in mid-March 2020 an expansion of telehealth services for Medicare recipients.

Our conviction remains that digitalization of the health care sector will remain a strong structural growth theme in the aftermath of the COVID-19 pandemic.

Did you change anything in your asset allocation due to the current market volatility?

Our Thematic Equity team invests in long term secular growth themes, which we believe will shape our society profoundly over the next five to ten years . We look through short-term volatility to focus on these long-term structural forces of changes.

We do not try to anticipate short-term market movements, simply because we do not believe that it is possible to consistently do this. We therefore remain fully invested in equities at all times.

We add value by identifying and understanding the long-term secular growth themes occurring in the world and selecting the “pure-play” investment opportunities best positioned to benefit from these long-term themes.

Our investment approach is bottom-up stock selection based on deep-dive fundamental analysis of the best pure-player companies in the digital health theme. We have a long-term outlook on the market of typically five to ten years, and follow a disciplined and rational approach to portfolio construction.

During the recent market correction, we did not make significant changes to our fundamental views of the Digital Health theme. We did, however, use the elevated market volatility to rebalance our holdings. We generally use market corrections to add to our highest conviction ideas.

Our experience shows that consistent and steady buying during periods of market weakness can add considerable value to long-term portfolio returns.

Can you please give us a few names of companies that are performing well at this moment?

Some companies in our fund have proven their value in helping with the situation around the COVID-19 pandemic.

Moderna was among the first company to start human trials for a possible vaccination during February 2020. They use a novel technology based on messenger RNA (messenger RNA is the set of instructions by which cells make all proteins and send them to various parts of the body).

The telemedicine and telehealth sector has also made a compelling case as to why contacting a doctor or hospital before a physical visit would be the preferred way to go in the future.

Companies like Teladoc in the US, Ping An Healthcare & Technology, and Alibaba Health Information Technology in China, have all performed well in this environment as investors recognized telemedicine as a valuable service in the event of a viral outbreak, and also under normal conditions going forward.

Another timely example would be Veeva Systems, which offers cloud-based solutions for the life science industry. Amid the current pandemic, Veeva serves as the digital backbone for its customers, namely large pharmaceutical and biotechnology firms such as Eli Lilly that are developing tests, treatments and potential vaccinations for the COVID-19 virus. Veeva Engage is their CRM (Customer Relationship Management) program, which helps to connect doctors with healthcare professionals remotely. Product usage surged by tenfold in the last few weeks.

Why the digital health transformation should continue to happen anyway?

Currently higher levels of market volatility are mainly driven by macro concerns resulting from the COVID-19 pandemic. This volatility does not reduce the importance of finding a solution to rising health care costs, nor affect the significant support from political and regulatory sides. We do not see a change to the long-term secular drivers behind the Digital Health theme.

As we face a world with many challenges and uncertainties, so many investments may be postponed until the economic outlook is clearer. However, in the current crisis, it is clearer than ever that there is an urgent need to tackle rising health care costs globally and this need cannot be postponed any longer.

What risks should we consider?

The Digital Health theme is focused on long-only equity investments investing globally in listed innovative companies, which often have a rather small market cap size, leading to a Beta greater than one. Therefore, in periods where the market is down, it is likely investments will underperform the market. However, the objective is to deliver outperformance over the long-term and through a typical cycle by diversifying investments within the Digital Health theme.

Do you have any questions?

Contact us for further information