Healthcare Technology and Innovation Stocks With Upside (Episode 9)

The combination? So there's definitely the broader market. The macro drivers concerns about inflation, rising interest rates and the uncertainty around the pandemic specific to healthcare. There are also some headwinds from the pandemic where various waves of Delta Omicron in that when there is a wave, it does tend to take over a lot of hospital capacity, which is already light to begin with and limits the amount of other things that can take place in the healthcare system like elective procedures. So you will see a pullback on stocks that are tied to procedural volume during some of the peaks, but because that is a trend that's very specific to coronavirus and the pandemic, we don't see that as a something that really impacts these companies from a fundamental perspective. And so therefore we believe that the underlying health of the sort of market leaders and the best in class healthcare companies is also very strong. So it's just an interesting time to look at this space.

Well, interestingly, a lot of the things that affect healthcare from a macro perspective don't necessarily impact healthcare tech. And I'll explain that further. So if you look at things like changes in the white house, changes in administration where certain healthcare priorities shift potentially from office to office, like topics like drug pricing, for example, or topics like Medicare for all was a term that was thrown around during the last election. When you have shifts in the white house, you tend to see ebbs and flows in healthcare trends. Those largely affect large cap healthcare companies like health insurance companies, large cap pharma. But when you look at healthcare tech, as like, as its own kind of vertical, and you could even use the H tech ETF as a proxy for that, because it's really exclusive to just healthcare tech forward companies, those do not tend to move with those same ebbs and flows.

And the reason why is because largely what we've seen in the last decade is why bipartisan support for healthcare tech as a whole. So there is no party that's arguing that telehealth shouldn't move forward. No one is arguing that cancer should be detected earlier. Like these are themes that are here to stay and they're widely supported and they don't shift things like drug pricing don't necessarily impact whether or not people are gonna innovate new drugs for rare diseases. So the things that do affect healthcare tech, though, from a more macro standpoint, are like when people are concerned about rising interest rates, they're concerned about companies that might not yet be profitable and how will they sustain during a rising interest rate environment. And potentially when companies have to raise prices and the end buyer decides that they don't wanna pay those prices and the company wasn't profitable to begin with, that's where you'll start to see some pressure on these stocks. Like the tech stocks took a big hit. And when that happened, starting last year and into this year, obviously health tech took a hit because these are all tech forward names,

Sure. Well, when we think about where the growth opportunity is in healthcare, and this is why we started this ETF, we wanted to be able to capture, provide exposure to investors, to all this interesting growth and disruption that's happening in the healthcare environment. If we take a step back and say, well, why is there all this disruption happening? If you think about healthcare, there are a lot of problems. And I don't think anybody would argue that right. There is a growing aging population. People over age, 85 are expected to double by 2040. And that is a population that needs a lot of healthcare services. Meanwhile, healthcare skilled healthcare workers are shrinking, and we don't have enough capacity that was exacerbated during the pandemic. So we had over a hundred thousand people lost their lives. Healthcare workers lost their lives because of COVID in the last couple of years, over half million in the United States alone have left their posts either from death or from burnout or doing something else for a living, or maybe their employer required a vaccination, and then they didn't wanna participate.

But that is a huge number. And that compounds the fact that we already had a healthcare worker shortage before the pandemic, an estimated 40% of physicians in the us are expected to be over age 65 in the next decade, meaning they could retire. So, and half the nurses are expected to retire the next 10 years, one out of two nurses who come into the field, wind up leaving within a couple of years to go do something else for a living. So we already had a shortage. And now this is becoming compounded at an unsustainable rate. And so there are other factors, medical error is a third leading cause of death in the United States. How do we get around all of these issues? The only way forward is with further adoption of robotics, automation, AI, and so healthcare that it was so UN digitized, it's the last economic sector to become digitized.

So given that there's so much upside up opportunity to, for digitization, that's where we're gonna see these stocks flourish and the ones that we're looking at, like in terms of data analytics, there's a company called health catalysts. We're watching health catalyst is a smaller company. A lot of people haven't heard about 'em, they're not in a lot of healthcare portfolios and this company is very good at integrating with hundreds of different software programs around a hospital, integrating with the lab, the electronic health record, for example. And when you can integrate with all these data sources and analyze it, you can start to look ahead into the future and say, Hey, in a zip code. So what patient population is at risk of becoming sick, let's do a search. You can search by. Let's say we wanna see all the number of females over age 40, who have not had a mammogram in the last five years. And maybe you find a large percentage of them in a certain zip code. So maybe that hospital system will wanna set up a campaign and try to proactively get in front of the population to conduct mammograms and breast cancer screens. That's just one example of the power of data analytics and how it can be used to reduce healthcare costs and do more with less cuz that's the theme that we're gonna be seeing moving forward.

Absolutely. And healthcare, like I said, just got digitized in the last 10 years with the adoption of electronic health records. Before that everything was on paper, paper charts, you went to the doctor office, you filled out a paper chart and it went into a file cabinet. You couldn't analyze large populations at the time. So, so data analytics has a really PO like really promising area and the digitization of healthcare. Another really interesting area is genomics. There's just been some really cool developments like in liquid biopsy. This is where you can draw a sample of someone's blood and analyze it and find things like free floating DNA. For example, of cancer cells. If you think about a cancer tumor, it sheds cells. And so those cancer cells can be free floating in a patient's blood. And rather than doing a biopsy, which they're not gonna go away, we're still gonna need people to do biopsies to analyze tumor tissue, but you might be able to detect cancer sooner by the patient's blood and detecting that free floating cancer DNA.

That's a really exciting development. And this early cancer detection area is something that all the genomics companies are going after in the H tech ETF alone, there was over 10 billion worth of M and a of companies like Illumina and exact sciences. And in VTA going after this space, so really exciting developments happening there. And we're gonna reach a point where in the next 5, 10, 20 years, by 2035, you might be able to get a prescription from a doctor to get a, a blood work, to get a cancer screen. So in fact, it actually already exists today. There are companies that already have things on the market like garden and Illumina through their acquisition of grail. So another really cool thing in genomics is spatial biology. This is what we expect to be the next frontier in genomic science. Everybody's heard about NextGen sequencing and when NextGen sequencing hits scale, and then the cost became lower about a, like in the last decade, the utilization took off.

And so did that industry and we expect the same. That's gonna be happening in the next couple of years with spatial biology. And if you want, I could go a little bit deeper into what that is. It's basically the opportunity to analyze a tissue sample by keeping the integrity. So think about a fruit smoothie. You take a bunch of fruit, you grind it up and then you can later analyze it and say, okay, I think there's raspberries in there. I think there's strawberries. I don't know how many though, but at fruit salad you can look and see exactly which fruits are in there. How many and exactly where everything's sitting. And the reason why that's important is because in precision medicine, there are therapies being developed to treat very specific genetic mutations. The problem is that sometimes the treatments don't work. Why don't they work?

Because there might be other genes sitting nearby the genetic mutation cells within the cancer tumor that are blocking that medicine from being effective. So by having more context around what's exactly going on within the cell within the, the tissue will help drive better and more effective therapies. This is real precision medicine. And so we are in very early days of adoption. And I think that as companies like a Coya ticker, a K Y a also NanoString is very involved in the spatial biology space as companies like that, continue to build scale and launch their high throughput instrumentation. We should start to see more biotech adoption, more clinical adoption over time

My answer is both. I think the real question from an investor's standpoint, I guess for us, at least what we're looking at is what is the opportunity for multiple expansion? Like, do these stocks go up over time? And one of the ways that we analyze that is, is their earnings growth potential, and they are high growth companies to begin with, but also what markets do they operate in and then are those markets growing? And the answer to all of that is yes, which makes them attractive investment opportunities, not just from an equity standpoint, but from a takeout standpoint. And as I mentioned earlier, there was over 10 billion billion of M and a in the liquid biopsy space alone in the last couple of years within our portfolio, that was all genomics companies buying up other genomics companies. So yes, absolutely. There is an opportunity for this, but even if there's not, we see them as attractive investment opportunities from a multiple expansion standpoint.

Potentially both. And that's why when I mention, so the portfolio I manage is diversified for a reason. It's not a biotech strategy, right? And the reason why is because we're analyzing individual stocks to determine who are the market leaders, who are the technology leaders, who are the disruptors and really conducting deep, fundamental research to find out which companies we want to invest in. The reason why I bring that up is because in a, let's say a pure play biotech portfolio, you're gonna have what you just described, a lot of hit or misses, right? What we're looking for are which companies truly have something promising in a platform that's gonna help get them there. So take Moderna for example, we didn't invest in Moderna because of the coronavirus vaccine we invested in Moderna because they were leading the way in mRNA research and development. They had over a dozen therapies already in the clinic before the pandemic even happened.

They were looking for vaccines for RSV HIV CMV was a lead candidate and they built this state-of-the-art facility. That's fully digitized. AI enabled. They use AI through every part of their process. So when looking for biotech names that you think have something promising, we're looking at the whole story, the whole platform opportunity for them to actually fulfill an unmet need. And then when an mRNA therapy finally did get approved. Now there's two on the market officially. The, it wasn't just a matter of, okay, now there's one, it was a positive catalyst for the whole industry to say, wow, mRNA really works. It's something that makes it meaningful for other investment opportunities in that space. That goes for all the biotech verticals, things across gene editing. For example, CRISPR, all it takes is for one CRISPR therapy to have success for everyone to get excited about all the other CRISPR therapies in the pipeline.

So it's not just about like trying to have one of everything it's about trying to have the companies that you think that you believe have sort of an edge that they're gonna be able to get something to market and then fulfill your other question. The unmet need. Is there 10 patients in the world with this disease? Is there a million? How much is money? Are they gonna be able to charge for each drug? So there's a lot of questions that go into this play, but really the things that we keep an eye on are the target that they're going after. And also what's their platform look like. And then actually I had something to add too, to your question about the M and a there's another data analytics company called Vocera and Vocera striker just announced that they're gonna acquire Vocera soryr is a MedTech giant global leader in many things.

And they are looking to acquire a company in our data analytics, sub sector called Vocera, ticker VCR for over 10 times next year sales. Wow. Yeah. And the health tech portfolio right now, our H tech portfolio is trading it five and a half times forward EV sales. So, so just to give you an example of the value perceived of the underlying stocks and yet where they're currently trading, there is a disparity and this makes for a very attractive entry point right now in healthcare tech VCE would be a very interesting asset for striker, because if you think about striker, they're everywhere, they are present through the, the entire patient journey, the ambulance ride, the emergency room, the, or they're present upon discharge in the patient bedside. And so Vocera brings an opportunity. What I mentioned earlier about data integration, device integration across all the different devices in the hospital, they do that among many other things, and they're gonna be able to develop, deliver more efficient care.

For example, less walking for nurses, better alarm management. There's a lot of alarms happening on a patient floor and people get alarm fatigue. Yep. And Vocera's data integration helps you differentiate which alarms are important and which nurse should hear which alarm. And so now striker armed with this extra layer of integration and analytics is going to make them even more powerful. They didn't invent that either. They're like the fourth med tech giant in the last three years to acquire this type of asset. So we expect to see further investment in general, across healthcare innovation, whether it's through upside opportunity or a takeout.

Possibly or beds surgical robotics, they've got Maco, they made a, another great acquisition Maco. And that's been doing well, they're the world market leader in orthopedic robotic surgery. So yeah, it's a solid company. And so when they announce that acquisition, people are like, wow, they're gonna pay 10 times for that asset. Well, yeah, it's a double digit growing asset with operating leverage. Um, who's closed last year with their all time record, high bookings and backlog. So when people think about like, oh, healthcare, it looks like risky. These are high growth names. Yeah, sure. And they're volatile and they move a lot. However, healthcare problems are not going away overnight. And the people who I say don't get involved with healthcare, innovation investing, I would say to them, don't get involved. If you think healthcare's fine right now, the way it is. And nobody thinks healthcare is fine the way it's

Yeah, exactly.

Well, they continue to innovate. So when I talk about how healthcare has to do more with less surgical robotics is one important way to do that. And being that they are the pioneer and the world market leader in general surgery, robotics, they're the ones to beat. They're the ones that everyone's gonna wanna chip at. They keep reinventing themselves. So they are their own technological disruptor. They're on their fourth generation of the da Vinci, who knows. It's only a matter of time before they announce another generation. They do. So every four or five years, and we're coming up on that time. But even if they don't, they've got some other great things in the pipeline that they've already launched. For example, general surgery is an area where they've a very strong presence, but they've recently launched ion, which is another robotic instrument that is more around bronchoscopy.

So further up the anatomy, what they can do with that is help. If you think about lung cancer, it's really difficult to biopsy tumor tissue for lung cancer. It's just really hard to reach places. And when you do the biopsy, it's hard to know if you got the right sort of part of the, the tissue to make an accurate diagnosis. So they are showing studies that are showing that they're able to dramatically improve the sample that is retrieved using the robot. It's able to get into those hard, to reach places that human hands have a tough time getting into. And with that earlier diagnosis, they can help save lives to give you some reference. There's about a five year survival rate for all stages of prostate cancer. It's about 98% and that's risen from 66% in 1975. But the five year average survival rate for lung cancer at all stages is about 18%. So there is a huge disparity and earlier definitive diagnosis can help close that gap. And that's something that intuitive is going after. So when you think about like, what's the upside here, it's well, one due to the stock having come in, this is a great opportunity for anybody who's wanted to get involved in the name for a long time, but also they just keep reinventing themselves. And there's a lot more that they can do with this.

Sure. We think about like a lot of the cool technology I discussed. There's a lot of people say, when you go after the gold rush, you wanna also make sure to invest in the picks and the shovels. And so that's like a bucket. We call process automation. These are the enablers of all the other cool stuff I just talked about. And so there's when I give you, when I talked about Moderna earlier, they would not have been able to get the hundreds of millions of doses across the finish line. Had it not been for the partnership of some of these companies, these outsourced third parties companies, they partnered with a company called Lonza and another one called Catalent. These are both in the H tech portfolio by the way, but Catalent's particularly interesting because they created a whole manufacturing line and have become a subject matter expert on mRNA manufacturing.

So when I mentioned earlier that now that there's an mRNA drug on the market, a couple of 'em that people are gonna get really excited about all the other potential mRNA therapies. Well, they're gonna need to partner with someone to help them manufacture all these drugs and get them out the door. If you look at, I mentioned Madena has got a state of the art facility. Most biotech startups do not have one. So when they go to put a drug in a clinical trial, they need to find a partner to help them manufacture that drug, put it in a pill form or in an injectable format. And you need a company to help you do that. Catalent has gone all in on these very specialized biotech type of therapeutics, the small batch quantities. These are areas that a lot of the large contract development manufacturing companies don't wanna get involved in, but Catalent is investment and heavily in it. And they they're able to help with these gene therapies and other smaller batch, very specialized therapies, as well as the large batch ones, like the mRNA vaccine. That's now in hundreds of millions of arms around the

Absolutely. Yeah. I mean, they keep reporting beats and raises, and it's particularly in this biologics division of theirs where they've invested heavily to be the premier manufacturer of helping all these biotech companies with their highly specialized drugs.

Yeah. Some of these companies are also involved in that Kodaks is another contract development, manufacturing organization. They specialize in exactly that. And they have companies in the food industry as clients of theirs, they partner with Nestle. But yeah, you're right. There are ways to leverage scale, not just in therapeutics, but in other sectors as

Sure. Check us out@roboglobal.com. And this is one way to be able to capture all the innovation that I just discussed in the healthcare sub sectors. There are nine different sub sectors in the H tech ETF, the tickers H tech HT E C, and feel free to reach out if anyone has any questions.

Thanks for having me really appreciate your interest.