David Talbot thinks he's on to a lucrative healthcare investment opportunity the world's brokerage firms have yet to discover.
"It's a $2.5 trillion (market) at least," says the president of HealthReform Partners, a New York-based investment manager with $50 million under management.
What HealthReform Partners has discovered is no big secret, really. The firm simply invests in companies whose products and services have global implications for containing healthcare costs or improving clinical outcomes. "We're investing in a trend rather than an industry," Talbot says.
Most investment dealers miss the boat, he says, because they narrowly define and track healthcare by industry segment, such as pharmaceuticals or medical devices. Call any pre-eminent brokerage in Europe or the United States and ask to speak to its "health reform analyst," Talbot suggests. More than likely, you'll end up speaking with a pharmaceutical analyst, he says, because that's the segment in which most firms concentrate their healthcare investments.
But the $250 billion worldwide drug industry represents just 10% of healthcare spending, Talbot says. The investment challenge for the next five to 10 years is selecting opportunities within "the other 90%," he says.
HealthReform Partners, a wholly owned subsidiary of New York-based asset manager Melhado Flynn & Associates, honed its investment strategy by "standing back and looking at the forest for the trees," says Talbot, a former pharmaceutical analyst ranked among America's best by Institutional Investor magazine.
HealthReform Partners oversees several private investment pools, including one for a U.S.-based limited partnership formed in May 1996. Last October the firm launched Healthcare Reform Investment Trust, a fund listed on the London Stock Exchange. British investment trusts operate like closed-end mutual funds in the U.S.
HRIT was introduced in London because not one healthcare products-and-services trust traded on the London exchange, Talbot says. The only competing funds included one for pharmaceutical stocks and another for biotechnology investments.
Talbot contends HealthReform Partners is "the only investment group looking at the cross-sectors of healthcare reform." He may be right.
"There doesn't seem to be a huge amount of coverage from the perspective of industry cross-sectors," says Jane White, an investment trust analyst for HSBC James Capel, a London-based brokerage firm that helped bring HRIT to market.
English investors haven't focused on the U.S.-based healthcare reform sector as an investment opportunity, White adds. "They have to have it shown to them," she says. But that may change as the trust's one-year results are circulated. HRIT was to celebrate its one-year anniversary Oct. 22. At MODERN HEALTHCARE's deadline, those results were not available.
Despite a rocky start, HRIT's performance has rebounded in recent months. Since its inception last October, the trust's net asset value has grown 24%. During this year through Sept. 30, it's up 17.9%.
Although U.S.-based investors can't buy into the fund, HealthReform Partners runs a limited partnership whose investment strategy mirrors that of HRIT. The U.S.-based fund has grown 33% this year through Sept. 30.
How the trust's performance stacks up depends on what benchmark you use. Standard & Poor's Healthcare Composite, the gauge Talbot uses, is up 25% through the third quarter of the year. The New York-based credit-rating agency's index includes 31 stocks spanning all healthcare sectors, but it is heavily weighted in favor of large-capitalization drug stocks.
Talbot looks for investment opportunities among small- and mid-capitalization companies, privately held firms and foreign firms. He also shops for bargains by sifting through out-of-favor stocks, niche companies that don't fit neatly into Wall Street's rigid sectors of industry coverage and companies that have fallen off their initial public offering prices.
Most important, he targets companies that take advantage of cost-containment pressures. For example, instead of investing in Genentech, a South San Francisco-based maker of clot-busting drugs, HRIT puts money in MedCath, a Charlotte, North Carolina-based operator of heart hospitals. Talbot likes MedCath's focus on the changing dynamics of heart treatment and its pursuit of better, low-cost treatments.
"The latest thing is lots of people are up in arms about managed care," Talbot says. That is where a company like Access Health, based in Rancho Cordova, California, can change medical practice for the better, he says. Best known for its Ask-A-Nurse telephone counseling service, Access Health guides callers to the appropriate level of medical care, thereby avoiding unnecessary trips to the emergency room. The company occupies the new and burgeoning niche known as "demand management."
Talbot also sees abundant global opportunities in healthcare delivery. He says Europe today is like the U.S. in 1992 when healthcare costs were running amok, and it's only a matter of time before Europeans begin adopting strategies that helped America put the brakes on healthcare inflation.