June 21, 2023
Jacob Celermajer, Portfolio Manager
• Healthcare’s resilient and robust demand persists throughout all stages of the economic cycle and remains in the early innings of a secular growth tailwind.
• Medical technology is easing the strain on exploding healthcare budgets around the world.
• Two years of rolling hospital closures has led to enormous pent-up surgical demand, which is now coming to the fore.
At Cordis, we believe that the global demographic shifts of an ageing population and growing middle class combine to present one of the most compelling secular investment tailwinds for decades ahead. The numbers that back up this belief are staggering. There were 1 billion people aged over 60 years old in 2019. This number will grow to 1.4 billion by the end of the decade, and more than double to 2.1 billion by 20501. Alongside population growth, wealth is being created faster than ever before. From 2011 to 2019, the global high-income population grew at an average of 15 million annually, and the middle class by 54 million people annually2.
The unfortunate reality posed by our current lifestyle – poor diets, toxic environments and sedentary behaviour – is leading to growing occurrence of chronic conditions. Chronic diseases, such as obesity, diabetes and arthritis, disproportionately affect the affluent population aged over 60 years. In the population of older adults almost 95% percent have at least one chronic condition, and more than 75% of have two or more3.
Indeed, the extraordinarily high growth in the prevalence of the aforementioned chronic diseases is a trend which is very likely to accelerate in the coming decades. This will continue to create an unrelenting demand for healthcare services that does not pay heed to economic cycles. While many trends play out over a multi-year period, the resilient and robust demand for healthcare is a true secular thematic that has decades to run.
This insatiable demand has created one of the most significant cost burdens to modern economies, especially across the developed world. The scope of this is borne out in the numbers, with forecasts now predicting that annual US healthcare spending will reach almost $7.2 trillion in 2031, growing faster than the country’s economy through the start of the next decade4. While people of all ages need healthcare, it is the older population causing the most strain, since chronic conditions account for two-thirds of all health care costs5 and 93% of US Medicare spending6.
Medical technology plays a significant role in easing the cost burden of global healthcare. There are a number of ways in which medtech can improve healthcare budgets:
- Early detection and prevention: advanced medical technologies, such as diagnostic imaging devices, genetic testing, and wearables, can aid in early detection and prevention of diseases. By identifying health issues at an early stage, healthcare providers can intervene promptly and provide more cost-effective treatments, potentially avoiding expensive and invasive procedures later on.
- Minimally invasive procedures: medical technology has led to the development of minimally invasive surgical techniques, such as laparoscopy and robotic surgery. These approaches often result in shorter hospital stays, faster recovery times, and reduced healthcare costs compared to traditional open surgeries, which typically involve longer hospital stays and more extensive post-operative care.
- Remote patient monitoring: telemedicine and remote patient monitoring technologies enable healthcare professionals to monitor patients’ conditions from a distance. This approach can reduce the need for frequent hospital visits, especially for individuals with chronic conditions, saving both time and money. Remote monitoring can help identify potential complications early on, enabling timely intervention and preventing costly hospital readmissions.
We believe there is very little that can derail the relentless demand for medical technology, but the COVID induced rolling hospital closures of the past two and half years certainly had an impact. However, such widespread hospital closures are almost unprecedented. They aren’t implemented during global events such as recessions or wars, and in fact haven’t been used since the Spanish Flu epidemic in 1918/19.
While surgical procedures were put on hold for an extended period, the chronically ill population didn’t disappear. These patients are now starting to get treatments that were previously hard to access. Earlier this month at a Goldman Sachs conference, United Health – North America’s biggest health insurer – detailed how they were seeing this backlog play out. John Rex, United’s CFO, commented that there is “certainly a meaningfully higher number of cases that are being performed”. This backlog for surgical procedures will further drive demand growth in the medical technology industry.
Cordis’ primary focus as a thematic fund investing in global medtech is to leverage off the ageing population, and mankind’s basic desire to live longer. While our Fund is only young, this is an investment thematic that has a proven track record. The Dow Jones U.S. Select Medical Equipment Index has returned 13% p.a. since its inception in 2006, against the 8% p.a. returns of the global share market over the same time7. Having come through a once-in-a-century global pandemic, and the resultant rolling hospital shutdowns, we see the environment as primed for medtech to flourish.
1. World Health Organization, Facts Sheets: Ageing. Accessed at https://www.who.int/health-topics/ageing#tab=tab_1
3. National Council on Aging. Chronic Inequities: Measuring Disease Cost Burden Among Older Adults in the U.S. A Health and Retirement Study Analysis. April 2022. Found on the internet at https://ncoa.org/article/the-inequities-in-the-cost-of-chronic-disease-why-it-matters-for-older-adults
4. National Health Expenditure Projections, 2022–31: Growth To Stabilize Once The COVID-19 Public Health Emergency Ends. Authors: Sean P. Keehan, Jacqueline A. Fiore, John A. Poisal, Gigi A. Cuckler, Andrea M. Sisko, Sheila D. Smith, Andrew J. Madison, and Kathryn E. Rennie. Accessed at https://www.healthaffairs.org/doi/full/10.1377/hlthaff.2023.00403
5. Centers for Disease Control and Prevention. The State of Aging and Health in America 2013. Atlanta, GA: Centers for Disease Control and Prevention, US Dept of Health and Human Services; 2013.
6. Centers for Medicare and Medicaid Services. Multiple Chronic Conditions. Found on the internet at https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/Chronic-Conditions/MCC_Main
7. CapIQ, data as at end of May 2023.
This report was prepared by Cordis Asset Management Pty Ltd ABN 68 637 078 490 a corporate authorised representative (No. 1282680) of Avenir Capital Pty Ltd ACN 150 790 355, AFSL 405469 (“Cordis”)”, the investment manager for the Cordis Medical Technology Fund (“Fund”). Equity Trustees Limited (“Equity Trustees”) ABN 46 004 031 298 AFSL No. 240975, is a subsidiary of EQT Holdings Limited ABN 22 607 797 615, a publicly listed company on the Australian Securities Exchange (ASX:EQT), and is the Responsible Entity of the Fund. This document has been prepared for the purpose of providing general information only, without taking account of any individual person’s investment objectives, financial circumstances or needs. Whilst every care has been taken in the production of this document, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. The information contained in this document is not intended to be relied upon as a forecast and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy, nor is it investment advice. Any forwarding-looking statements or forecasts are based on reasonable assumptions, but cannot be relied upon as guarantees or representation as to what future performance will actually occur. Unless otherwise specified, the information contained in this document is current as at the date of issue and all amounts are in Australian Dollars (AUD). You should consider the Product Disclosure Statement (“PDS”) in deciding whether to acquire, or continue to hold, the product. A PDS and application form is available at www.cordisam.com. Cordis and Equity Trustees do not guarantee the performance of the Fund or the repayment of the investor’s capital. To the extent permitted by law, neither Equity Trustees, Cordis, nor any of their related parties including its employees, directors, consultants, advisers, officers or authorised representatives, are liable for any loss or damage (including consequential loss or damage) arising directly or indirectly as a result of reliance placed on the contents of this report. Past performance is not indicative of future performance. The unit price performance calculation methodology follows the FSC Standard No.6: Investment Option Performance – Calculation of Returns (July 2018). Total returns are calculated based on changes in net asset values, at the exit price after the deduction of fees and expenses. Due to individual circumstances, your net returns may differ from the net returns quoted above.