“Innovation is the future delivered.”
Jorge Barba
As investors with a Future Quality ethos, our aim is to keep our portfolios ahead of the pack over the long term by seeing further and envisioning the investment opportunities of tomorrow. In short, we seek to invest in not only what is, but what will be.
In practical terms, this means monitoring the pulse of change, following the impacts of structural and demographic developments and staying alert to innovation. In recent times, the exciting and disruptive innovations surrounding artificial intelligence have captured market attention. But if you look beyond the headlines, innovation is transforming other sectors by delivering new solutions to the world’s most pressing requirements. Healthcare is a sector undergoing profound change so why aren’t investors more excited about these innovative opportunities?
To learn about Future Quality investment trends in addition to Healthcare, download Nikko AM’s new investment guide: Seeing Further in Changing Times.
Rapid innovation
The pace of innovation in healthcare is rapid. Just last year, the US Food and Drug Administration (FDA) approved 55 novel drugs, the second-highest figure in the last 30 years and a nearly 50% increase compared to 2022[1]. New healthcare models are being developed all the time and artificial intelligence (AI) will likely take a major role in healthcare in the fullness of time.
The healthcare sector is particularly well-placed to offer solutions to the very pressing demographic challenges faced by society over the coming decades, such as ageing populations and the accompanying rise in chronic disease that will place a huge financial burden on governments worldwide.
In our view, investors' apparent indifference towards healthcare as an investment opportunity could stem from several reasons. Firstly, it is a technical and complex area with investors arguably needing both medical and technological knowledge to successfully seek out those companies on a path to leadership while avoiding those whose advantages are fading. Secondly, it could be argued that investors’ disregard for the sector has been skewed by short-term considerations. 2023 was a challenging year for some healthcare subsectors as the Covid-driven inventory build-up for medical supplies was abruptly unwound and negatively impacted reported earnings.
Covid supercharged healthcare investment
But in our view, those focusing on the Covid hangover are missing the bigger picture of the pandemic's positive long-term impact on the sector in terms of innovation and scientific advancement. In reality, the enormous amount of funding that flowed into healthcare innovation during the pandemic, alongside the unusual permission to move fast and break things – an adage that is normally reserved for the technology rather than the more risk-averse healthcare sector – ushered through significant healthcare developments in a matter of months that would have taken decades to achieve in normal times.
These rapid, but impactful, achievements included the development of Covid vaccines (Messenger RNA technology in particular), the building out of manufacturing capacity to make them available to the world and providing the cold-chain storage that made possible the transportation conditions required by some of these vaccines. Then as new strains evolved, the industry responded with the faster identification of these mutations and, thanks to the ongoing development of genomics databases, the industry was able to quickly recognise which new parts of the virus needed to be attacked by the vaccines to ensure efficacy.
Not only did these Covid-inspired innovations help make a tragic situation far less tragic than it could otherwise have been, but these accelerated scientific advances underpin massive healthcare changes that will unfold over the coming years and decades. For example, Messenger RNA technology is still in its infancy, but as well as being applicable for Covid-type viruses it is also being used to develop potential cancer vaccines. Gene therapies, and some of the more personalised medicines now being trialled, can provide medical professionals with a better understanding of why some people respond to certain medicines differently and more positively than others.
AI-driven transformation and cost efficiency
We are also just at the emergence of witnessing the impacts artificial intelligence (AI) and digital pathology will have on the sector. AI is already being harnessed to deliver better diagnostic imaging and treatment recommendations, the earlier detection of diseases such as cancer, as well as the faster identification of molecules that could lead to the development of even more new medicines. And the application of artificial intelligence within healthcare is only beginning so the scope for future transformation is high.
An area of interest for us is companies that harness the power of data and AI-driven data management to demonstrate how their offering represents good value for money. In the realm of in-patient rehabilitation, US-based Encompass Health Corporation is a strong example of how a company can use data to present itself as a solution rather than a problem to healthcare payers. In-patient rehabilitation facilities look after patients who have suffered from a stroke or other acute healthcare episodes; having invested heavily in IT over the last decade, these facilities are now able to capture data to demonstrate that they can achieve much better health outcomes at a lower cost for the payer (i.e. governments) than other sources of care. In our view, more informed debate between facilitators and government payers could be a key differentiator of growth going forward as cost becomes ever more critical.
Source: Centers for Medicare & Medicaid Services, Office of the Actuary, National Health Statistics Group; U.S. Department of Commerce, Bureau of Economic Analysis; and U.S. Bureau of the Census. Data as of year-end 2022.
Stock selection is key
While our conviction about the opportunities in healthcare is strong, our constructive view on the healthcare sector is very much built from the bottom up. While staying attuned to healthcare advances, we also aim to find companies within these areas of innovation that can meet our Future Quality criteria of being efficient with capital and attaining and sustaining rewarding returns. Right now, we see plentiful potential for above-average growth in areas such as life sciences tools, healthcare distributors and equipment suppliers. And with the right stocks, we believe the healthcare theme will benefit from a long and productive lifespan.
For more information on our global equity investment process, please download Nikko AM’s new investment guide: Seeing Further in Changing Times.
Important information: This document is prepared by Nikko Asset Management Co., Ltd. and/or its affiliates (Nikko AM) and is for distribution only under such circumstances as may be permitted by applicable laws. This document does not constitute personal investment advice or a personal recommendation and it does not consider in any way the objectives, financial situation or needs of any recipients. All recipients are recommended to consult with their independent tax, financial and legal advisers prior to any investment.
This document is for information purposes only and is not intended to be an offer, or a solicitation of an offer, to buy or sell any investments or participate in any trading strategy. Moreover, the information in this document will not affect Nikko AM’s investment strategy in any way. The information and opinions in this document have been derived from or reached from sources believed in good faith to be reliable but have not been independently verified. Nikko AM makes no guarantee, representation or warranty, express or implied, and accepts no responsibility or liability for the accuracy or completeness of this document. No reliance should be placed on any assumptions, forecasts, projections, estimates or prospects contained within this document. This document should not be regarded by recipients as a substitute for the exercise of their own judgment. Opinions stated in this document may change without notice.
In any investment, past performance is neither an indication nor guarantee of future performance and a loss of capital may occur. Estimates of future performance are based on assumptions that may not be realised. Investors should be able to withstand the loss of any principal investment. The mention of individual securities, sectors, regions or countries within this document does not imply a recommendation to buy or sell.
Nikko AM accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this document, provided that nothing herein excludes or restricts any liability of Nikko AM under applicable regulatory rules or requirements.
All information contained in this document is solely for the attention and use of the intended recipients. Any use beyond that intended by Nikko AM is strictly prohibited.
Japan: The information contained in this document pertaining specifically to the investment products is not directed at persons in Japan nor is it intended for distribution to persons in Japan. Registration Number: Director of the Kanto Local Finance Bureau (Financial Instruments firms) No. 368 Member Associations: The Investment Trusts Association, Japan/Japan Investment Advisers Association.
United Kingdom: This document is communicated by Nikko Asset Management Europe Ltd, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority (the FCA) (FRN 122084). This document constitutes a financial promotion for the purposes of the Financial Services and Markets Act 2000 (as amended) (FSMA) and the rules of the FCA in the United Kingdom, and is directed at professional clients as defined in the FCA Handbook of Rules and Guidance.
Luxembourg and Germany: This document is communicated by Nikko Asset Management Luxembourg S.A., which is authorised and regulated in the Grand Duchy of Luxembourg by the Commission de Surveillance du Secteur Financier (the CSSF) as a management company authorised under Chapter 15 of the Law of 17 December 2010 (No S00000717) and as an alternative investment fund manager according to the Law of 12 July 2013 (No. A00002630).
United States: This document may not be duplicated, quoted, discussed or otherwise shared without prior consent. Any offering or distribution of a Fund in the United States may only be conducted via a licensed and registered broker-dealer or a duly qualified entity. Nikko Asset Management Americas, Inc. is a United States Registered Investment Adviser.
Singapore: This document is for information to institutional investors as defined in the Securities and Futures Act (Chapter 289), and intermediaries only. Nikko Asset Management Asia Limited (Co. Reg. No. 198202562H) is regulated by the Monetary Authority of Singapore.
Hong Kong: This document is for information to professional investors as defined in the Securities and Futures Ordinance, and intermediaries only. The contents of this document have not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong. Nikko Asset Management Hong Kong Limited is a licensed corporation in Hong Kong.
New Zealand: This document is issued in New Zealand by Nikko Asset Management New Zealand Limited (Company No. 606057, FSP22562). It is for the use of wholesale clients, researchers, licensed financial advisers and their authorised representatives only.
Kingdom of Bahrain: The document has not been approved by the Central Bank of Bahrain which takes no responsibility for its contents. No offer to the public to purchase the Strategy will be made in the Kingdom of Bahrain and this document is intended to be read by the addressee only and must not be passed to, issued to, or shown to the public generally.
Kuwait: This document is not for general circulation to the public in Kuwait. The Strategy has not been licensed for offering in Kuwait by the Kuwaiti Capital Markets Authority or any other relevant Kuwaiti government agency. The offering of the Strategy in Kuwait on the basis a private placement or public offering is, therefore, restricted in accordance with Decree Law No. 7 of 2010 and the bylaws thereto (as amended). No private or public offering of the Strategy is being made in Kuwait, and no agreement relating to the sale of the Strategy will be concluded in Kuwait. No marketing or solicitation or inducement activities are being used to offer or market the Strategy in Kuwait.
Kingdom of Saudi Arabia: This document is communicated by Nikko Asset Management Europe Ltd (Nikko AME), which is authorised and regulated by the Financial Services and Markets Act 2000 (as amended) (FSMA) and the rules of the Financial Conduct Authority (the FCA) in the United Kingdom (the FCA Rules). This document should not be reproduced, redistributed, or sent directly or indirectly to any other party or published in full or in part for any purpose whatsoever without a prior written permission from Nikko AME.
This document does not constitute investment advice or a personal recommendation and does not consider in any way the suitability or appropriateness of the subject matter for the individual circumstances of any recipient. In providing a person with this document, Nikko AME is not treating that person as a client for the purposes of the FCA Rules other than those relating to financial promotion and that person will not therefore benefit from any protections that would be available to such clients.
Nikko AME and its associates and/or its or their officers, directors or employees may have or have had positions or material interests, may at any time make purchases and/or sales as principal or agent, may provide or have provided corporate finance services to issuers or may provide or have provided significant advice or investment services in any investments referred to in this document or in related investments. Relevant confidential information, if any, known within any company in the Nikko AM group or Sumitomo Mitsui Trust Holdings group and not available to Nikko AME because of regulations or internal procedure is not reflected in this document. The investments mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors.
Oman: The information contained in this document nether constitutes a public offer of securities in the Sultanate of Oman as contemplated by the Commercial companies law of Oman (Royal decree 4/74) or the Capital Markets Law of Oman (Royal Decree80/98, nor does it constitute an offer to sell, or the solicitation of any offer to buy non-Omani securities in the Sultanate of Oman as contemplated by Article 139 of the Executive Regulations to the Capital Market law (issued by Decision No. 1/2009). This document is not intended to lead to the conclusion of any contract of whatsoever nature within the territory of the Sultanate of Oman.
Qatar (excluding QFC): The Strategies are only being offered to a limited number of investors who are willing and able to conduct an independent investigation of the risks involved in an investment in such Strategies. The document does not constitute an offer to the public and should not be reproduced, redistributed, or sent directly or indirectly to any other party or published in full or in part for any purpose whatsoever without a prior written permission from Nikko Asset Management Europe Ltd (Nikko AME). No transaction will be concluded in your jurisdiction and any inquiries regarding the Strategies should be made to Nikko AME.
United Arab Emirates (excluding DIFC): This document and the information contained herein, do not constitute, and is not intended to constitute, a public offer of securities in the United Arab Emirates and accordingly should not be construed as such. The Strategy is only being offered to a limited number of investors in the UAE who are (a) willing and able to conduct an independent investigation of the risks involved in an investment in such Strategy, and (b) upon their specific request.
The Strategy has not been approved by or licensed or registered with the UAE Central Bank, the Securities and Commodities Authority or any other relevant licensing authorities or governmental agencies in the UAE. This document is for the use of the named addressee only and should not be given or shown to any other person (other than employees, agents or consultants in connection with the addressee's consideration thereof).
No transaction will be concluded in the UAE and any inquiries regarding the Strategy should be made to Nikko Asset Management Europe Ltd.
Republic of Korea: This document is being provided for general information purposes only, and shall not, and under no circumstances is, to be construed as, an offering of financial investment products or services. Nikko AM is not making any representation with respect to the eligibility of any person to acquire any financial investment product or service. The offering and sale of any financial investment product is subject to the applicable regulations of the Republic of Korea. Any interests in a fund or collective investment scheme shall be sold after such fund is registered under the private placement registration regime in accordance with the applicable regulations of the Republic of Korea, and the offering of such registered fund shall be conducted only through a locally licensed distributor.
[1] https://www.technologynetworks.com/drug-discovery/news/2023-saw-second-highest-number-of-drug-approvals-in-30-years-382685
