By Dr Ash Patel, Investment Manager at Mercia
As early and growth-stage investors we are obsessed with understanding where value creation will lie in the future. For Mercia’s Life Sciences & Bioscience steam, this means focusing on the areas of healthcare where we can have the maximum impact on improving patient outcomes and reducing healthcare system costs. In this article, Dr Ash Patel explores the macroeconomic trends that we believe will drive value creation in healthcare for the next generation of businesses.
Increased life expectancy and the aging population
Let’s start with a big one. This is probably the single greatest challenge facing our societies at present. Modern science (and with it modern medicine) has been an overwhelming success in the human story.The average life expectancy of an individual living in a developed economy has grown consistently since World War 2, resulting in a female child being born in the UK today expecting to live to 82.8 years on average compared to 71.5 years for the same child being born in 1951. This is as a result of improved childhood survival due to vaccines, the massive reduction in infectious diseases over this period, and the increasing availability of treatments for chronic illnesses such as hypertension and heart disease.
Along with challenges posed to governments about how best to provide long-term pension incomes for a population now living for significantly longer than previous generations, a significant challenge lies in the provision of healthcare. Many of the healthcare systems we have in Europe and North America were originally designed in the period after the Second World War, when the population demographics were entirely different. As a result, a new generation of technologies are required to reduce the cost of caring for an increasingly elderly population, whilst also dealing with the physiological challenge of providing interventions for the elderly. Surgery and anaesthesia were always designed with young patients in mind, and as our population ages, we are going to have to develop better technologies that are more suitable for dealing with patients with multiple existing health issues, but still expect (and deserve) a high quality of life post-care. These technologies must work both en-masse and at scale, in order to bring down the cost of complex care which is vital for the NHS.
As a trained hospital intensive care doctor, it’s clear to me in the clinical environment that new technologies are needed to ensure older people can benefit from surgeries that both prolong and improve the quality of life. At Mercia, we believe the next generation of technologies that help this segment will be drivers of innovation and value generation. Companies like Canary Care (a Mercia Technologies PLC portfolio company) are building technologies that help older people live independently for longer, bringing dignity for users, peace of mind for carers, and reduced costs for payers like the NHS or local councils who will potentially have fewer people needing expensive residential care. We believe companies like these will form vital parts in a healthcare ecosystem geared towards an older population.
Acceleration of development in “emerging” markets
Over the last few decades, the majority of commercial interest in healthcare has been focused on Europe and North America, but the coming years will see an increase in expenditure from high-growth “emerging” markets. The BRICS countries (Brazil, Russia, India, China and South Africa) have seen pharmaceutical sales double between 2006 and 2011 – so crucially, maintaining cost-effectiveness at a scale is of paramount importance.These high growth markets consist of a blend of public and private care provision and encourage a consumer mentality towards purchasing care.Novel organisational structures are also required to meet this growing demand for single country populations that in effect, are larger than the whole of Europe.
It is anticipated that some of the most valuable healthcare companies in Europe will generate a large proportion of their sales from BRICS economies. In my opinion, key features of success in these economies will include targeting so-called diseases of plenty (obesity, hypertension and diabetes) which are becoming increasingly prevalent as societies are lifted out of poverty. For example, in China 10% of all adults are currently thought to have diabetes. This is up from 5% of all adults in 1980. In absolute terms, this represents a patient population of 110million, with further growth in this disease expected to result in 150 million patients by 2040. This is likely to result in market demand for new products and services such as targeted therapeutics that are optimised for the genetic make-up of the Chinese population, improved diagnostic tests, and methods of delivering care to in a cost efficient manner across a population sizes that are measured in the billions.
Key challenges for new entrants to the market will be understanding rapidly changing regulatory landscapes, navigating the political risks associated with being a foreign company in economies with varying levels of restrictions, and the challenges of intellectual property protection in jurisdictions where traditionally, it has been difficult to defend a product or service from imitators. However, with the BRICS economies predicted to overtake most of those in Western Europe by the middle of the century, we believe there is a significant chance that the most valuable companies may be those that serve these markets first. We’ve backed exciting companies like Concepta, which is bringing the latest fertility technologies to China and aiming to help millions of couples start a family. These kinds of opportunities in emerging markets show that it’s entirely possible to solve problems and capture value on a greater scale outside of Europe and North America.
The 4th Industrial Revolution
Scarcely a day goes by without a tech blogger talking about the upcoming revolution in “digital health.” Whilst digital health covers a wide variety of innovations, we are particularly interested in computational health as this actually reflects what is happening – computers helping to deliver healthcare. With recent high-profile failures,including IBM Watson being “benched” by prestigious US cancer centre MD Anderson, as reported by Forbes, it’s easy to think that computers in healthcare may be over hyped.
While current technologies may struggle to accommodate for all of the complexities in healthcare, this is often because the data used to train these systems is often incomplete. Considering that Google’s DeepMind system trained itself on 10 million YouTube videos before it learnt to recognise an image of a cat – you can start to sympathise with systems that have access to only thousands of medical records which then try to do something as complex as recognise cancer.
Furthermore, 80% of all medical data is unstructured, sometimes hand written, making it hard for super computer systems to process it. This results in a serious lack of data to train with. If the systems were trained better, the performance would be better, which would lead to significant reductions in the cost of healthcare delivery at almost every point in the value chain and improved patient care – transforming healthcare as we know it. Unfortunately, this seems a distant dream at present, but the 4th industrial revolution will change that.
If we consider that the 1st industrial revolution was the advancement of steam engines in the 18th Century, the 2nd was the growth of electricity, the 3rd was the movement from analogue to digital machines and the 4th is the development of data-driven tools – then these are instruments that gather, analyse and store data on a scale that has previously never been seen before, and it is these machines that will power the computation technologies of the future. Data really is the new oil. Interestingly, electronic medical data (which is perfect for systems like IBM Watson to process) is growing at a rate of 48% per year. Put into context, by 2020, 94% of all medical data available will have been created after 2013. This fresh data is largely electronic and ready to be processed.
The opportunities for new companies to emerge in this space are significant and Mercia is working with many of these organisations already through our managed fund activity. These companies are data-capturing companies that allow us to understand healthcare problems better (sleep-focused portfolio company SleepCogni), image recognition technologies that spot problems in X-rays that clinicians may miss (Manchester Imaging–dental imaging),regulatory technologies that ensure the latest developments stay on the right side of government regulators (new portfolio company Miotify), and even tools that let clinicians understand the needs of their patients better by improving communication and tracking outcomes (Health Centrified). These businesses all solve problems that affect global populations. This isn’t just about value capture – it’s about genuine value creation. And in my opinion, computational technologies in healthcare will change the world of medicine and in doing so will generate immense value.
Oil falls after surging past $65 on Texas freeze
By Stephanie Kelly
NEW YORK (Reuters) – Oil prices fell on Thursday despite a sharp drop in U.S. crude inventories, as market participants took profits following days of buying spurred by a cold snap in the largest U.S. energy-producing state.
Brent crude fell 41 cents, or 0.6%, to settle at $63.93 a barrel. During the session it rose as high as $65.52, its highest since January 2020.
U.S. West Texas Intermediate (WTI) crude futures fell 62 cents, or 1%, to settle at $60.52 a barrel, after earlier reaching $62.26, the highest since January 2020.
Brent had gained for four straight sessions before Thursday, while WTI had risen for three.
“The market probably got a little bit ahead of itself,” said Phil Flynn, a senior analyst at Price Futures Group in Chicago. “But make no mistake, this selloff in oil doesn’t solve the problems. The problems are going to persist.”
Though some Texas households had power restored on Thursday, the state entered its sixth day of a cold freeze. It has grappled with refining outages and oil and gas shut-ins that rippled beyond its border into Mexico.
The weather has shut in about one-fifth of the nation’s refining capacity and closed oil and natural gas production across the state.
“The temporary outage will help to accelerate U.S. oil inventories down towards the five-year average quicker than expected,” SEB chief commodities analyst Bjarne Schieldrop said.
Prices dropped despite a decrease in U.S. oil inventories. Crude stockpiles fell by 7.3 million barrels in the week to Feb. 12, the Energy Information Administration said on Thursday, compared with analysts’ expectations for an decrease of 2.4 million barrels.
Crude exports rose to 3.9 million barrels per day, the highest since March, EIA said.
“The big nugget was the big jump in exports of crude oil,” said John Kilduff, partner at Again Capital in New York. “We’ll have to see what happens with that next week weather in Texas, but I have been looking for a pickup there for a while.”
Oil’s rally in recent months has also been supported by a tightening of global supplies, due largely to production cuts from the Organization of the Petroleum Exporting Countries (OPEC) and allied producers in the OPEC+ grouping, which includes Russia.
OPEC+ sources told Reuters the group’s producers are likely to ease curbs on supply after April given the recovery in prices.
(Additional reporting by Yuka Obayashi in Tokyo; editing by Emelia Sithole-Matarise, Steve Orlofsky, David Gregorio and Jonathan Oatis)
GameStop frenzy sparks fresh investment in stock-trading apps
By Jane Lanhee Lee
OAKLAND, Calif. (Reuters) – The recent trading frenzy centered on GameStop Corp and other “meme” stocks is sparking a wave of investor interest in start-ups aiming to mimic the success of Robinhood Markets Inc, whose no-fee brokerage app has helped drive a trading boom.
Public.com, a direct competitor to Robinhood that boasts a host of blue-chip backers, said on Wednesday it had raised $220 million, valuing it at $1.2 billion on the private market. Another well-heeled rival, Stash, said earlier this month it had raised $125 million, while Webull Financial LLC, backed by Chinese investors, is also raising fresh funds after enjoying an influx of new users.
Robinhood, meanwhile, raised some $3.4 billion in the midst of the GameStop furor to assure its stability amid rapid growth and demands by its trading partners that it post more collateral.
The fresh investments are coming even as government regulators ramp up scrutiny of Robinhood and others involved in the GameStop trading. A U.S. congressional committee on Thursday grilled the chief executive of Robinhood and a YouTube streamer known as “Roaring Kitty,” among others, as it probes possible improprieties, including market manipulation.
Robinhood came under stiff criticism from some quarters for restricting trading in GameStop and other shares at the height of the frenzy, a move the company says it was forced to make due to requirements of partners that settle trades. It has also drawn scrutiny for a business model that relies on payments for sending trading business to partner brokerages, a practice Public.com and some other rivals are pledging to avoid.
Investors see rich opportunity in bringing easy stock trading to smartphone users globally, though the companies say they are also cognizant of the risks.
Stash, which doubled its active accounts to over 5 million by the end of last year, operates with only four trading windows a day to discourage rapid speculative trading, it said.
U.K.-based Freetrade.io told Reuters by email that its user numbers last year grew six-fold to 300,000 and by mid-February had reached 560,000. It said it had raised a total $35 million, including from crowd-funding rounds from over 10,000 customers.
But it does not offer margin trading or riskier offerings. “These products encourage investors to behave as if they are gambling or speculating rather than investing,” a Freetrade.io spokesman said.
Interest in trading apps is soaring globally. In Mexico, trading app Flink launched seven months ago and already has a million users, according to co-founder and chief executive Sergio Jimenez. He said Mexicans can buy fractions of U.S. stock through the platform, but not Mexican stocks – yet.
“Ninety percent of them are investing for the first time,” said Jimenez.
Flink raised $12 million in a funding round in February led by Accel, an early investor in Facebook. Accel is also an investor in Public.com and Berlin-based Trade Republic Bank Gmbh, which allows European retail investors to buy fractions of U.S. stocks, according to Accel partner Andrew Braccia.
“The bigger story here is there’s just this global trend of… accessibility,” he said.
Start-up investors also see opportunity in the infrastructure behind the trading apps. DriveWealth, which serves Mexico’s Flink and 70-plus other online trading apps around the world, has hundreds more partnerships in the pipeline, according to founder and chief executive Bob Cortright. DriveWealth provides the technology to power digital wallets and trading apps, and also provides clearing and brokerage service to its business partners.
“This is this is only beginning,” said Cortright. “The fact that you could have a smartphone in your hand in India, for instance, and buy $10 worth of Coca-Cola stock at an instant, that’s pretty game-changing.”
Venture capital investments in U.S. fintech companies hit a record last year with $20.6 billion invested, according to data firm PitchBook. Globally, around $41.4 billion was invested in fintech companies in 2020.
(Reporting By Jane Lanhee Lee in Oakland; Editing by Jonathan Weber and Dan Grebler)
Analysis: Debt-laden world, rising bond yields – a toxic taper tantrum combo
By Dhara Ranasinghe and Karin Strohecker
LONDON (Reuters) – In May 2013, bond investors threw a tantrum after hints the U.S. Federal Reserve might slow the money-printing presses. A similar selloff now, with another $70 trillion added to global debt, could prove to be far more vicious.
A 2013-style “taper tantrum” was named as one of the top market risks in BofA’s February poll of fund managers who fear a pick-up in inflation expectations might soon persuade central banks to start withdrawing or “tapering” stimulus.
Some like former U.S. Treasury Secretary Larry Summers even predict this will happen sooner than anticipated if huge government spending sparks runaway inflation.
Such fears drove U.S. 10-year borrowing costs to near-one year highs on Tuesday. Equities slipped off record peaks; long-dormant gauges of Treasury market volatility flickered into life.
“Higher rates means higher rates volatility, means higher spreads and market selloffs as we saw back in 2013,” said Kaspar Hense, portfolio manager at BlueBay Asset Management who has pared exposure to Treasuries, expecting their 30-40 bps year-to-date yield rise to continue.
“There is no doubt the risks are greater this time around than 2013 because of the high leverage in the system.”
Global debt today stands at $281 trillion, according to the Institute of International Finance, versus $210 trillion in 2013. Companies and households too owe significantly more.
Economic growth and inflation can whittle away debt. Yet the very policies put in place to aid recovery can encourage more borrowing.
Debt is keeping central banks in “a loop of never-ending provision of liquidity and of very low interest rates,” said Steve Ellis, global fixed income CIO at Fidelity International.
“The only way to keep the plate spinning is keep refinancing costs low.”
Graphic: Debt levels on the rise since 2013 Taper Tantrumb – https://graphics.reuters.com/GLOBAL-BONDS/TANTRUM/bdwvknkrepm/chart.png
What bears watching is the “real” or inflation-adjusted bond yield that represents the true cost of capital. The 100 bps-plus spike in real U.S. yields of 2013 has not happened so far this time, sparing equities and emerging markets the fallout.
It also implies markets are not factoring a central bank response to higher inflation expectations.
That may be why, taper tantrum fears notwithstanding, BofA survey participants are holding equity and commodity allocations near decade-highs — with real yields near minus 1%, U.S. stocks still pay a 5% premium over bonds.
HIGHER, LONGER, WILDER
It’s not just the sheer weight of debt that makes markets more sensitive to interest rate moves.
After the interest rate collapse of recent years, just 7.8% of global government and corporate bonds on the Tradeweb platform yield 3% or more.
Global shares trade at 20 times forward earnings versus 12.5 times in May 2013.
Investors have fanned out into higher-yielding junk-rated debt and the BofA survey found a record proportion holding above-normal risk exposure.
Finally, investors are loaded up on longer-maturity debt.
Duration — how long it takes to recoup the original investment — is now 8.5 years on the ICE BofA World Sovereign Bond Index, two years more than in 2013.
Graphic: Investor exposure to duration rises – https://graphics.reuters.com/GLOBAL-BONDS/oakveradypr/chart.png
Longer-dated assets also expose investors to higher ‘convexity’ in the price-yield relationship, meaning a small rise in yields causes outsize losses.
That’s been highlighted this year to holders of Austria’s 100-year issue where a 35 bps yield rise has knocked prices 20% lower. Similarly, a 40 bps rise in 30-year U.S. yields has translated into a 4% price fall.
Ellis estimates holders of 10-year Treasuries would lose 4.62% over a month if yields rise 50 bps from current levels. A similar rise would have caused a 4.46% loss in 2013.
Similarly, JPMorgan Asset Management calculates a 1% rise across the U.S. curve would cause total annual price returns on a 30-year Treasury to fall 19%. Two-year notes would suffer a 2% price loss.
NOT ALL BAD
Some say delaying the tantrum might make matters worse.
“It’s better to put up with the tantrum when someone is two than when they are 14,” said David Kelly, chief global strategist at JPMorgan Asset Management.
Graphic: Are markets gearing up for another taper tantrum? – https://fingfx.thomsonreuters.com/gfx/mkt/yzdpxwndrvx/tapertantrum1502.png
But most policymakers have made clear they will not hurry. Cleveland Fed President Loretta Mester for instance said the Fed was keen to avoid taper tantrums and wouldn’t withdraw support until the economy was stronger.
Central banks also are less keen than previously to tighten policy in response to a price surge, having repeatedly pledged low rates even if inflation overshootsm.
Scars from 2013 and higher global indebtedness will force central banks to “lean against” market tantrums, asset manager BlackRock reckons.
Finally, emerging markets which bore the brunt of past tantrums, appear better placed this time. Many countries, including those reliant on foreign capital in 2013, now run balance of payments surpluses.
“Positioning in emerging market securities and currencies is far below previous cycle peaks, especially 2013,” said Bryan Carter, head of EM debt at HSBC Asset Management, pointing to higher bond risk premia and cheaper valuations.
Graphic: U.S. yields and EM capital flows – https://fingfx.thomsonreuters.com/gfx/mkt/oakvermzxpr/US%20yields%20and%20EM%20capital%20flows.PNG
(Reporting by Dhara Ranasinghe, Sujata Rao and Karin Strohecker; additional reporting by Saikat Chatterjee; editing by Sujata Rao and Toby Chopra)
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