Investing opportunities as health care goes high tech

For investors looking to capitalize on innovation, the health-care sector offers plenty of investment opportunities, not to mention potentially strong returns. On the S&P 500, the sector has returned nearly 9% year-to-date, and nearly 23% on the TSX.

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Health care is dedicated to the development and delivery of therapeutics, and “in both of these segments, innovation plays an absolutely critical role,” said Michal Marszal, senior equity analyst, health care, at CIBC Asset Management.

On the development side, life science tools and biotechnology underpin most of the innovation, Marszal said.

Companies within life science tools provide supplies for scientific research and clinical trials. In this space, innovation within molecular biology is accelerating, creating a greater understanding of how cells function and interact, said Marszal, who co-manages the CIBC Global Technology Fund and the Renaissance Global Science and Technology Fund.

Such research provides insight into organ systems and disease. In particular, evolving areas of “great interest” are spatial genomics, spatial transcriptomics and spatial modinomics, Marszal said.

“The first two areas are mostly looking at trying to come up with new modalities, new molecules that will be in the future tested in clinical trials,” he said. “The last is mostly focusing on … new ways of treating and diagnosing various conditions.”

Valuations in life science tools and medical technology are less attractive compared to other health-care segments, Marszal said. He thus suggested investors focus on leaders in the space such as Medtronic, based in Ireland with mostly U.S. operations, and Massachusetts-based Thermo Fisher Scientific. Leaders in the highest growth segments, such as California-based Illumina and Pacific Biosciences, have “solid” long-term outlooks, he said.

In biotechnology, from a broad pharmaceutical perspective, the trend is toward specialized developments, Marszal said.

“The key theme underpinning that trend is the notion of personalized medicine,” with drugs being designed to treat certain conditions more effectively for specific patients, he said.

Today’s clinical reality includes genes therapies, leading to gene insertions and gene editing, Marzsal said, with significant impacts for oncology, immunology, rare genetic disorders and neurosciences.

In selecting biotech names, Marszal said he focuses on best-in-class assets in the most attractive therapeutic categories.

To assess those categories, he looks for “clearly validated science and ideally strong proof-of-concept data,” he said. Risk management is also key, particularly with the sector’s frothy valuations.

Biotech names he cited include Massachusetts-based Sarepta Therapeutics, which focuses on gene therapy for muscle disorders, and names in oncology such as Connecticut-based SpringWorks Therapeutics, and Massachusetts-based Deciphera Pharmaceuticals and Mersana Therapeutics, which have “leading assets in development, clearly validated science and a set of very attractive forward-looking, value-creating catalysts,” Marszal said.

Within biopharmaceuticals, he considers companies that are tapping the latest innovations while also optimally managing their base businesses.

“What I … look at is the quality of those base businesses — specifically, individual assets, their exposure to the most attractive therapeutic categories and geographies, and emerging pipelines that are probably unlikely to be well priced in by the broader market,” Marszal said.

Tokyo-based multinational Takeda Pharmaceutical Co. is an example, and has a “severely discounted base business by the market and a completely under-appreciated pipeline of … both late- and early-stage development candidates,” he said.

On the delivery side of health care, innovation is about adapting to economic realities, Marszal said.

“The innovative solutions trying to optimize the delivery of the right solutions to patients at the right cost is where the majority of the innovation is flowing through the entire services industry within health care,” he said.

The U.S. health-care system, for example, which accounts for one-half of global health-care demand, is trending toward a “value-oriented, evidence-based application of care,” he said. This includes balancing in-patient and outpatient treatments, using remote health-care services such as telemedicine, and is made possible by data analytics.

Investors looking at opportunities in health-care services should consider long-term fundamentals, Marszal said, and “scale is key.”

An example is Rhode Island–based CVS Health Corp. — “an emerging leader with a highly attractive vertically integrated business model that is at the forefront of innovation within delivery of [U.S.] health care,” Marszal said.

Another example is North Carolina–based multinational IQVIA. The company uses “enormous scale and data analytic capabilities,” Marszal said, including various machine learning algorithms, to optimally design clinical trials and gain market share in the services segment.

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