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Trends Watch: Long/Short Equity Investing in Health Care

Aug 3, 2023

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Samuel D. Isaly, Managing Partner & Founder, Exome Asset Management.

What is your outlook for long/short equity investing in health care?

The worldwide stock market has a value of approximately $100 trillion, of which 10% to 12% is composed of health care opportunities. The largest worldwide sectors include technology, finance, health care and energy, of which technology is the largest. Health care, with a market value in excess of $10 trillion, offers abundant opportunities from which investors may choose. We estimate that the sector consists of roundly 600 companies with market values in excess of $1 billion, of which the largest is Lilly with a value of about $450 billion. The largest geographic market in health care is the United States, but the second largest market, China, is not far behind. For a variety of reasons, in future years India is expected to surpass China.

“Health care” includes a variety of subsectors, typically divided into “pharma,” “big biotech,” “emerging biotech,” “medical devices,” “sequencing and sequencing applications,” “diagnostics,” and “health care services,” including service providers (e.g., hospitals) and health care insurance.  Depending on the definition, “pharma” accounts for about 50% of health care market value.

Typically, in health care investing, “things” go right, and “things” go wrong.

Growth of worldwide health care is insistent. United States observers may note that health care accounts for a bit less than 20% of the economy and that it has been stable at that level for the past five years or so. Outside the United States, and especially in emerging markets, far less than 20% of the economies is accounted for by health care. The only direction to go is up.

Where do you see the greatest opportunities and why?

Growth in health care is driven by demand and supply. On the demand side, sector observers usually cite demographics and higher incomes. On the supply side, it is technological advance. If we simplify and estimate that the nominal growth rate for worldwide health care is 10%, we propose the contributions from demographics at 1%, from higher incomes at 4% and from technological advance at 5%. Quite clearly, technological advance is the most important of the three. While “big biotech” and “emerging biotech” are generally characterized as the most important engines of opportunity, we find technological advance across the board. Devices in cardiology such as pacemakers, defibrillators and stents have saved millions of lives. Delivery of care has been “industrialized” beyond hospital inpatient treatment, sometimes by surgical robots (another advance in itself), to include day surgeries and walk-in clinics. As investors, we search for companies that can deliver 10% unit growth over an extended period of time.

What are the greatest challenges you face and why?

Our greatest challenges are basically two-fold. We must acquire information quickly, and we must interpret it correctly. The speed of transmission of information makes it difficult to “get there” before others do. Further – and related -- we need analytical skills based on extensive training and experience. To add a somewhat lesser challenge, we need to have processes in place to execute smoothly and economically; we need to respect various rules and regulations; and we need to report quickly and correctly to our investors.

What keeps you up at night? 

The markets keep us up at night. Remember, we are worldwide investors. The Japan market opens not so long after the United States market closes. Korea and China come next, followed by India and Europe, and back to the United States. While this observation is somewhat flippant, other things “keep us up at night.” We worry about product failures. We worry about decisions by bureaucrats. We worry about pandemics. We worry about earnings shortfalls. Much concerns us. The other side of concerns is the realization that health care improves peoples’ lives. This work is exciting work. This work is noble work.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.

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Elana Margulies-Snyderman

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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