13 August 2020
American Century Investments explains how impact investing in healthcare can pay social and financial dividends, but that data shortfalls make the story harder to tell. Ahren Lester reports.
Impact investing in the healthcare sector is a great way to accelerate innovation in treatments and widen access to medicine, American Century Investments (ACI) says, but a lack of clear impact data makes it harder to tell the story to investors.
Speaking on Environmental Finance's "Build Back Better" webinar on "Impact investing in the healthcare sector," ACI portfolio manager Henry He said that a "confluence" of factors in recent years has made such investment increasingly attractive.
"On the demand side there was acceleration in the need for health care due to various macro-demographic trends," he says. "Fortunately, on the other side, we also see a lot of very interesting innovation across the entire healthcare sector."
He – who manages ACI's $1.7 billion healthcare impact listed equity strategy – says that there are a number of "wonderful things" going on in the biotechnology, pharmaceuticals, medical devices, healthcare IT and healthcare delivery industries which provide bountiful opportunities for healthcare impact investors.
With global populations ageing, developing economies growing rapidly, scientific advances continuing to deliver innovative medical solutions, and technology disrupting how healthcare is done and how it is accessed there is compelling need for capital investment and a strong growth backdrop to achieve financial return.
Consequently, ACI focuses on four main healthcare impact investment themes: innovative treatments, enhancing productivity, expanding access, and solutions for lowering costs.
Data drag for impact investors
Lack of data that can be used to demonstrate impact, however, is an issue that makes it hard to describe to investors why impact investment in the sector is worthwhile. This is particularly true as different impact investments in healthcare often deliver very different outcomes.
"There is a story we want to tell our investors, but [in some cases we] just don't have the data. How do you aggregate impact data? That's a huge problem," He says.
Biotech firm Bluebird – part of ACI's impact portfolio – is a case in point, He says. The firm has a gene therapy for sickle cell anaemia as well as a cell therapy for cancer. The issue is that the sickle cell treatment serves to reduce and even eliminate pain symptoms that can often be debilitating for patients. In contrast, the cancer treatment can extend the life of a patient with the disease.
"There is a story we want to tell our investors, but [in some cases we] just don't have the data. How do you aggregate impact data? That's a huge problem"
He says that "we can't aggregate this data, as one is survival and one is quality of life". The development of initiatives or regulations that allow healthcare firms to provide a breakdown of their positive and negative social impacts, therefore, would be "great" for providing a uniform way of presenting healthcare impact metrics that could be used across the portfolio of investors like ACI.
"That would make my job so much easier," He says. "It is so hard to get metrics from companies, and part of it is for reasons of competition.
"We have a company that's early stage and whose commercial products won't be on the market for years. They're very eager to give you all sorts of metrics about the size of the market and potential benefit."
"I would be so happy if I can get numbers which are closer to impact. R&D spending and number of drugs in developments are great, but if I can actually measure how many lives are being touched – even better"
In contrast, he says that once a company is on the market selling products and treating patients, then the quantity and depth of disclosure "really comes down."
He says that these larger firms often treat such data "almost like commercial secrets". These larger firms can often only be judged by metrics mandated by the government for disclosure: research and development (R&D) spending and number of drugs and devices in development and trials.
"I would be so happy if I can get numbers which are closer to impact," He says. "R&D spending and number of drugs in developments are great, but if I can actually measure how many lives are being touched – even better."
Strong, defensive returns
Despite the dearth of useful data for impact investors, the traditionally defensive healthcare sector brings with it strong potential for generating both social and financial return.
During the market turmoil that marked the early part of 2020 as the economic effects of the coronavirus pandemic became apparent, the healthcare sector delivered the non-correlated defensive performance often seen from it.
Yet He emphasises that focusing on impact within the healthcare sector did not result in detriment to performance. During the first six months of 2020, the American Century Health Care Impact Equity fund outperformed the Russell 3000 Health care Index – delivering a 4.96% positive return compared to 1.82% from the index. What is more, the fund outperformed the index since its inception in October 2018.
Coronavirus emphasises impact opportunity
The coronavirus crisis has also accelerated trends which provide ample opportunities for impact investors in healthcare. He says an "extreme example" is the rapid growth in telemedicine during the pandemic, the provision of medical services via the internet or phone.
"It's cheaper than office visits, cheaper than emergency room visits, cheaper than urgent care. It's convenient for both patients and doctors.
"It is also really a great benefit for access. Even in the US – which has the highest per capita spending on healthcare – 80% of the rural areas in the US are medically underserved. And, if you look at the population globally, that need is even more significant."
Prior to the coronavirus pandemic, telemedicine had not really taken off due to what He describes as "too much inertia, conservatism, and regulation in healthcare".
The uptake in telemedicine since coronavirus, however, has grown significantly. Teladoc – a telemedicine firm in the ACI Health Care Impact portfolio – has seen its usage climb more than seven times higher than prior to coronavirus.
The pandemic has also encouraged what He calls a "de-escalation" in healthcare. The way patients tended to approach healthcare was to seek an excess of care, He says, by demanding to see a specialist or have a hospital visit even if such a level of care is unnecessary for effective treatment.
"But in this current environment, we have a de-escalation in care," He says. "On top of that, more broadly, what we are seeing is a focus on wellness, rather than just simply care. We're seeing a lot more focus on prevention."
Profiting from prevention
Indeed, He believes that prevention is another area where impact investing can reward in healthcare.
"Prevention is kind of like telemedicine, it is another concept that everybody in healthcare believes in, but it's hard to implement because of the conservatism within the system," He says. "If you think about a typical provider, whether it be a clinic or hospital or physician, a nurse, a lot of times they're compensated based on how much volume goes through their offices. So their incentive is to treat more sick people and not really to make sure that the patients stay well, because then that's actually perversely against their economic self-interest."
To accelerate preventative medicine, therefore, requires a change in incentive. That is why ACI invests in S&P500-listed health insurer UnitedHealthcare. He acknowledges that its investment in the largest health insurer in the world raises some questions about how such a giant – which has a "terrible" reputation amongst its customers – can deliver positive impact.
"Prevention is kind of like telemedicine, it is another concept that everybody in healthcare believes in, but it's hard to implement because of the conservatism within the system"
Nonetheless, UnitedHealthcare's Optum division – which provided just under half of its revenue and profit in 2019, and is growing rapidly – is trying to deliver this prevention-focused healthcare system through what are known as Accountable Care Organisations (ACOs).
ACOs are a group of physicians along with clinics and hospitals that are assigned a certain number of patients. The insurer then agrees to pay a set amount each year for the care of these patients but also agrees that if they can keep the patients healthy, any savings the insurer makes will be split with the ACO.
"So the incentive now is trying to make sure the patients are healthy," He explains. "You're not denying the patients care, but you're trying to make sure they're staying healthy and happy. So, that's a new model that is just focused on prevention rather than treatment."
|Top 10 Holdings of ACI Health Care Impact fund, as of 30 June 2020|
|UnitedHealth||Health care services||8.4|
|Abbott Laboratories||Health care equipment||5.2|
|Intuitive Surgical||Health care equipment||4.6|
|Danaher||Health care equipment||4.1|
|CVS Health||Health care services||3.8|
|Stryker||Health care equipment||3.7|
|Edwards Lifesciences||Health care equipment||3.3|
Watch the full "Impact investing in the healthcare sector" webinar here, including comments from Ken Gustavsen, chief of staff and strategy officer, social business innovation at Merck & Co (known as MSD outside the US and Canada). See upcoming webinars in the Build Back Better series here.
Environmental Finance would like to thank American Century Investments, the sponsor of this webinar, for its support.