"Living longer in good health" now in UCITS format

Healthcare on the Brink: Aging Retirees' Health Will Bankrupt the System

The growth engine of the main GDP-producing countries is jamming

In about 15 years, the number of retirees per 100 people in the workforce (called the Old-age dependency ratio) will be close to or above 40. This demographic shift indicates a shrinking labor force relative to the number of dependents. A smaller labor force means fewer workers and reduced economic output. A decline in the labor force participation rate by just 1% could reduce GDP growth by approximately 0.5 percentage points. Combined with reduced consumer spending, as retirees spend about 25% less than working-age households, this may necessitate higher taxes on the diminishing workforce or increased public debt, suppressing economic growth on all fronts. 

The superaged population adds a significant burden to the healthcare system

A superaged society does not just mean lower consumer spending but also increased health issues and the need for more pensions. The OECD projects that additional expenditures on pensions and healthcare could rise by 1-2% of GDP in many countries by 2030 due to aging populations.

In the United States, per capita healthcare spending for individuals aged 65 and older was about $14k in 2021, nearly five times higher than spending for children and three times higher than for working-age adults. In large part due to the overwhelming prevalence of chronic disease.

Life span has increased like never before in the history of mankind but not healthspan.

The share of our lives in poor health has not diminished over time. On average, people spend about 50% of their lives in less-than-good health, including 12% in poor health. WHO data suggest this ratio has not changed much in the past 50 years. The upshot is that we spend more time in moderate and poor health in absolute terms than at any other point in history. The situation may gradually worsen, mainly in high-income countries, where chronic conditions now afflict growing numbers of people for a significant portion of their lives. 

Literature on life satisfaction shows that having a substantial health problem—defined as declining from “good health” to “poor health”—reduces life satisfaction twice as much as losing a job or becoming widowed, divorced, or separated and five times as much as losing half of one’s income.

So, how do we not end in bitterness for the people and society? By enabling massive saving with automation.

Healthcare's Trillion-Dollar Savings: Automation to Slash Costs for Patients and Governments

The central part of healthcare spending is labor cost and administrative cost

In 2022, 17.3% of the U.S. GDP was spent on healthcare, representing $4.5tn. The U.S alone accounted for 51% of the world's spending on healthcare that year. Breaking down the cost: labor and administrative costs eat up most of the pie

• Administrative costs constitute a large portion of healthcare spending. In the United States, they account for approximately 25% to 31% of total healthcare expenditures. Estimates by AHA put the administrative cost between $1tn to $1.5tn. That is a large underestimation as physicians also spend nearly 49% of their office time on administrative work, reducing the time available for patient care. 
• Labor costs account for over 65% of total healthcare expenditures. They exploded with the COVID-19 pandemic. The most striking increase is within hospitals, where labor cost used to be "only" 48% of the Hospital budget pre-COVID, compared to 60% last year.

Despite all the noise about the price of expensive new therapies or procedures, drugs and medical supplies including devices account for less than 20% of total spending on care. 

Both labor and administrative tasks can be at least partly automated 

Administrative tasks,  which we view as a data processing operation, offer significant opportunities for enhancement through automation.

For example, errors in billing and coding of the Medical Act cost the U.S. healthcare system up to $17bn annually—almost half of the $40bn budget for nationwide cancer screening!

Another example would be the cost per claim which can also be drastically reduced. Manual processing of a single claim costs about $4 compared to $1.36 when automated. With billions of claims processed annually, automating claims could save about $11.1bn annually in labor costs alone.

For physical processes, we can point out that of the 250'000 people who die each year in the U.S. due to medical errors, 35% are related to surgery. It's no surprise that 75% of lawsuits against surgeons in the U.S. are filed because of intraoperative errors.

Robotic surgery has proven successful in reducing medical errors and healthcare costs. On average, patients who undergo robot-assisted surgery stay 8 days in the hospital, compared to 10 days for those who have open surgery, resulting in a 20% reduction in hospital stay. Additionally, robotic surgery significantly reduces the complication rate (13.2% vs. 23.7%) and the chance of readmission by half. There is also a striking four-fold reduction in the prevalence of blood clots (deep vein thrombosis and pulmonary embolism), a significant cause of health decline and morbidity, compared to patients who had open surgery.

The first barrier to entry is cost, but the real challenge is upskilling surgeons. AI plays a crucial role in training on the best procedures and upskilling new surgeons faster by using robots and providing live feedback. Demonstrations of Intuitive Surgical's latest robots are mind-blowing. Considering that 300mn surgeries were performed worldwide last year and Intuitive Surgical, the leader in robotic surgery, only performed 2.2mn of them, the potential is immense.

A second line of automated physical processes is automated pharmacies. These systems can reduce medication errors by up to 50% knowing medication errors are the most common and preventable cause of patient injury. They typically involve administering the wrong drug or dose, using the wrong route, administering it incorrectly, or giving medication to the wrong patient. The reported incidence of medication errors in acute hospitals is approximately 6.5 per 100 admissions and adds up to $50bn of added healthcare costs, disability, and lost productivity. 

Not all sectors of healthcare move at the same speed toward automation, but all move toward it.

Medical imaging is at the forefront of automation

First, because radiologists must embrace it, the Association of American Medical Colleges projects a shortfall of up to 42'000 radiologists by 2033 in the United States alone, while the demand for medical imaging is ever-increasing. Adopting AI and automation is designed to help mitigate the shortage of radiologists. 

AI algorithms triage imaging exams by identifying critical findings, ensuring that urgent cases receive immediate attention. According to a study in the Journal of the American College of Radiology, this has been shown to reduce the reporting turnaround time for critical findings by 50%.

AI automation optimizes the use of imaging equipment by reducing scan times and scheduling gaps, increasing utilization rates by up to 15-20%. 

Yet the real benefit is better patient care; as an example, in the case of breast cancer, if the cost of diagnostics can be lower, then we could go from leaving half of the cancer unscreened to 100% detection while leaving the budget unchanged.

• Digital Breast Tomosynthesis  detects 47% of all cancers at a cost of $933mn
• Ultrasound detects 51% at a cost of $1.84bn
• Molecular breast imaging detects 71% at a cost of $4.16bn
• Contrast-enhanced mammography detects 80% at a cost of $3.87bn
• MRI detected 100% at a cost of $6.36bn

The global aim is to tilt the balance towards more preventative care than reactive care; today, the spending for preventative care represents only 4.8% of the national health expenditure of the U.S.

The next section will describe how we build the exposure within our Bionics strategy.

Our Bionics strategy now offers exposure to the sector in UCITS format.

The Bionics investment universe is comprised of 560 stocks

To refine our selection of companies within the Bionics space, we undertook a comprehensive analysis. We began by extracting the revenue breakdowns of all stocks with a market capitalization exceeding $500mn in the GICS Healthcare Equipment & Services sector. These revenue sources were classified into a hierarchical tree structure comprising 235 end-level categories.

Further expanding our scope, we incorporated companies from other GICS sectors that overlap with our thematic focus—specifically those reporting segments of their revenue aligned with the Bionics mandate.

Our approach yielded a universe of 560 stocks, accounting for 634 classifications, including companies active in multiple subsegments of Bionics. The following figure illustrates the first two layers of our classification hierarchy.

Our top-down and bottom-up approach highlighted eleven growth market segments

Our internally developed information system integrates our top-down market model—drawing from both external sources and internal analyses—and compares it with bottom-up aggregates of the companies we have classified.

Through this approach, we have identified eleven segments, primarily within our care equipment and diagnostics classification, that meet our investment criteria. This forms the basis of our portfolio's exposure.

The strategy is atonra style: Market sensitive, Small and Mid Cap oriented and exposed to growth

Our recent Fama-French analysis over the past three years indicates that, compared to our peers, our strategy has greater market exposure, increased sensitivity to small and mid-cap (SMID) risk premiums, and a negative correlation with value investing. Given the current shift in market dynamics—with interest rates lowering—we expect our strategy to outperform. Lower interest rates typically benefit growth-oriented and smaller-cap stocks due to reduced borrowing costs and increased investment, while diminishing the appeal of traditional value investments. This positions our strategy advantageously to capitalize on the evolving economic landscape.

To be more specific about the metrics of our current strategy portfolio, we can highlight some key characteristics:

• Earnings per share (EPS) growth is particularly notable, with Bionics posting a 3-year CAGR of 34.8%, more than double the NASDAQ 100’s 16.1%.    
• The PEG ratio is 1.4 for Bionics, better than NASDAQ 100’s 1.8. Our portfolio companies are more reasonably priced relative to their future growth, offering better value for growth-oriented investors.
• P/Sales ratio (4.5x vs. 5.1x), the combination of high earnings and revenue growth with attractive valuations suggests that the portfolio companies are still priced reasonably relative to their growth potential. 

Overall, Bionics presents a compelling investment opportunity due to its higher growth rates, attractive valuations relative to growth (PEG), and more focused exposure to smaller, high-potential companies.

Strategic Entry: MedTech Valuation at Discount to Nasdaq100, Aligned to historical average with S&P500

The recent decline in MedTech valuations has brought the sector back to its long-term average relative to the S&P 500. Compared to the Nasdaq, the price-to-sales (P/S) ratio now reflects a discount, sitting well below historical levels.

This creates a strategic opportunity to invest at a more attractive valuation. The industry has been steadily growing at a 6% CAGR from 2016-2024, up from just 3% CAGR between 2008-2015. This growth has been driven partly by the FDA's accelerated approval pathway, which has expedited market access for MedTech companies since 2015.

Decorrelation to the broad market and Nasdaq100 is at the highest since 2019

Amid the upcoming U.S. elections, China's efforts to stimulate its economy, escalating geopolitical tensions in the Middle East, and Europe slipping into recession, global markets are facing heightened uncertainty and volatility. In this challenging environment, our strategy offers a level of decorrelation within the equity basket at its highest since 2019, providing investors with a valuable opportunity to diversify risk. Investors seeking to navigate these turbulent times can benefit from our approach, which aims to mitigate market risks while capturing long-term growth trends.

Take-away

Healthcare spending is projected to continue outpacing GDP growth, driven by an aging population, the rise of chronic diseases, and significant systemic inefficiencies. Building on seven successful years since launching our strategy in AMC format, we are now introducing a UCITS sub-fund classified under SFDR Article 8. This fund is designed to capture the long-term growth potential of healthcare automation while capitalizing on the current shift in market dynamics—such as the Federal Reserve's interest rate cuts—and providing investors with diversification.

Catalysts

• Healthcare Data Integration and Interoperability. Unsiloed healthcare data could be used to train AI models to speed up tasks.

• Big tech forms major partnerships with hospitals to implement automation solutions. Driving generalist investor in the space.

• Insurers offer discounts to providers implementing automation to reduce errors and costs. As the strongest financial incentive for change, insurers have a central role to play.

Risks

• Hospital budget contraction.  An intensifying labor shortage could limit deployment in automation.

• Reimbursement plan downsizing. Downsizing reimbursement would hamper the market penetration rate.

• Unexpected GLP-1's headwind. MedTech investors since August last year are prompt to react too quickly to news in the obesity space.