Stockholm (HedgeNordic) – Digitalization is changing many facets of every industry, including healthcare. In response to the rapidly accelerating digital transformation within healthcare, last year the team running Rhenman Healthcare Equity L/S added the “healthcare information technology” sector as a fifth leg of its diversified healthcare-focused portfolio.
Managed by a team of three portfolio managers led by Henrik Rhenman and Susanna Urdmark, Rhenman Healthcare Equity L/S seeks to achieve diversification through exposure to different subsectors within the healthcare space. “We have been working to achieve diversification since the inception of the fund,” says Susanna Urdmark, who co-heads the team that runs the healthcare-focused hedge fund alongside founder Henrik Rhenman. “Even though we are still within healthcare broadly, we do invest in different subsectors to achieve diversification.” Before last year’s addition of “healthcare IT” as the fifth subsector, the previous subsectors included: biotechnology, pharmaceuticals, medical technology and healthcare services.
“Even though we are still within healthcare broadly, we do invest in different subsectors to achieve diversification.”
“With several properties distinct for these companies and their business models, we did not think healthcare IT could be included in any of the other subsectors,” Urdmark explains the addition of the fifth leg. “Medical technology, for instance, involves bringing new technologies to solve very specific medical problems, such as a hip or knee replacements or putting a stent in your heart,” she elaborates. Healthcare IT, however, is very different. Healthcare IT can refer to the use of technologies, IT tools, or software designed to improve various aspects of the healthcare system, including enhancing hospital and administrative productivity, providing new insights into medicines and treatments, or improving the overall quality of care provided. “We thought that it would make sense to add another leg within our portfolio.”
“With several properties distinct for these companies and their business models, we did not think healthcare IT could be included in any of the other subsectors,”
Digitalization Within Healthcare
There are two main forces driving digitalization within the healthcare industry. “On the one hand, the development is driven by payers and providers, because they want to address the waste issue in healthcare,” argues Urdmark. “There are billions of dollars that go to waste because the systems are not delivering care in an efficient manner.” The coronavirus pandemic has also accelerated digital transformation within the industry.
“The pandemic put a great focus on digitalization because there was no way to deliver care unless you had a different solution to the restrictions to meet in person,” explains Urdmark. Secondly, with consumers becoming more diligent and informed about their health through unprecedented access to information, the digitalization of healthcare has received an additional boost. “Consumers or patients have traditionally been passive receivers of care. Through technology in so many other areas and aspects of our lives, the consumer wants to be more involved in the decision-making that takes place around their care,” says Urdmark. This development has boosted growth in areas such as virtual care, mental care, remote monitoring of chronic patients, among others.
“The pandemic put a great focus on digitalization because there was no way to deliver care unless you had a different solution to the restrictions to meet in person.”
Care delivery has been one of the many beneficiaries of digital transformation, with drug development also set to benefit from digitalization. “There are a lot of solutions that could improve efficiency and enhance decision-making to help drug development companies make safer and better decisions that can improve success rates in drug development,” argues Urdmark. “There is an abundance of opportunities to improve efficiency and optimize decision-making in a lot of areas within healthcare.”
Common Denominator: Innovation
The addition of a fifth subsector within its portfolio does not change the team’s focus on innovation. “What is important is that the common thread in all our investments, independent of what subsectors we look at, is innovation,” emphasizes Urdmark. “We look for innovation. We want to invest in companies that bring innovation, a new way of thinking and something that will bring value to systems, patients, payers and other different stakeholders.”
“We look for innovation. We want to invest in companies that bring innovation, a new way of thinking and something that will bring value to systems, patients, payers and other different stakeholders.”
The long-biased Rhenman Healthcare Equity L/S, which has over €1.0 billion under management, has generated an annualized return of 18 percent since launching in mid-2009 through the end of November this year. “We have had a long bias, mainly based on low valuations in the sector, since we started the fund more than 12 years ago and we are not shy of admitting that,” Henrik Rhenman comments on the fund’s long bias towards the healthcare industry. “It has been quite good years to be long. We have had the fortunate position to be in a very prosperous environment for this industry since inception.”
“It has been quite good years to be long. We have had the fortunate position to be in a very prosperous environment for this industry since inception.”
“There has been a high level of innovation over many decades. Many new promising therapies are being developed within areas such as cancer, immunology, gene- and cell therapy and metabolism, which will continue to drive growth for our sector for the foreseeable future,” confirms Susanna Urdmark. The highest level of innovation within the healthcare industry over the past decade has occurred within the biotech sector, which was reflected in the sector allocation within the fund’s portfolio. “Historically, we have had a heavy bias towards biotech. That is because most of the innovation has happened within this subsector,” she continues. “Biotech has had a significant role to play in the performance we have achieved so far.”
“Historically, we have had a heavy bias towards biotech. That is because most of the innovation has happened within this subsector.”
However, the sector allocation has been more balanced in the coronavirus pandemic-induced environment. “With so many different factors contributing to how markets had been evolving, with no one really knowing how quickly markets and economies would recover, what part of the economy would drive the recovery, we have been much more balanced in dividing capital to these different subsectors,” says Urdmark. Despite focusing on innovation, “we need to take into consideration market sentiment, macro factors, and of course valuations.”
“Our short book reflects our view on the healthcare industry and has so far reflected our very optimistic outlook.”
“We have continuously looked for situations where we should be more cautious and the pandemic was such a situation,” agrees Rhenman. “Our short book reflects our view on the healthcare industry and has so far reflected our very optimistic outlook. In the next two to three years, we are expecting a very good market for the sector,” the founder of Rhenman & Partners elaborates. “What happens next quarter or in a year is difficult to know, but I think we have a few years that we can still continue the strategy that we have had since inception,” he continues. “Once we get to more mature environments for our sector, then that is the time to short. We are willing to sit out and wait for those opportunities. It’s the final result that counts.”