Investing in Healthcare

Published on 12/04/20 | Saurav Sen | 2,135 Words

The BuyGist:

  • This is a reaction to the pandemic. But ours is a long-term bet. 
  • We have a (short but growing) Watch List.
  • The Watch List tells us what revenue growth we need to believe in order to buy into some of these companies.
  • But how do we know what is believable?
  • It's important to put some context around revenue growth rates. That's what this analysis is about.

Investing in Inevitabilities

We realize it’s rather audacious of us to proclaim something as inevitable. In investing, there is no such thing as an inevitability. But there are things that come close. While we don’t have the luxury of finding “sure things”, we do have the luxury of finding “high-probability tailwinds”. Increase in Healthcare Expenditure around the world is one such high-probability tailwind. In this Worldview article, we put some numerical context to this hypothesis. The final objective, as always at The Buylyst, is finding ways to INVEST in this force of Progress.

We should declare right away that we are not going to invest in pharmaceutical or biotech companies. We don’t understand the science, and we won’t invest based on rumors or the next hot thing. We like “sleep at night investing”; a big part of sleeping well at night is being able to decompose future revenue estimates down to “Price times Volume”. If we can’t do that, we assume Price as constant while we focus on estimating volume growth. Specifically, we estimate “growth we need to believe in order to invest in the company”. That’s Expectations Investing. But in order to estimate “volume growth we need to believe” we need some context or some concrete datapoints on the product’s end-markets. Otherwise, how will we know what growth number is easy to believe and what isn’t?

With Pharma and Biotech, it’s hard to estimate sustainable volume of drugs sold by a specific company. It’s harder still to estimate new drugs that will be hot sellers. For that, we’ll need to estimate the number of people with disease XYZ at some point of time in the future. But with Healthcare Equipment, we’d find our guesstimates more believable. It’s easier to guesstimate volume based on broader, more macro end-markets. The end-market is a growing population that is likely to age synchronously around the world through the next few decades. Age is an inevitability, and it just might be an investable concept.

We are initiating a Healthcare Equipment Theme, which will include tools, hardware and software. Yes, this is a reaction to the Covid-19 pandemic. You may say that we should have poured in money back in March. You would be right. But:

  1. We’re never bogged down by errors of omission. We’d rather not make errors of commission. Also, our money was tied up in other lucrative opportunities that helped us beat the S&P 500 by a big margin.
  2. We’re looking ahead one or two decades. The pandemic, we believe, is just a booster shot for a long-term tailwind that may drive revenue growth beyond what’s priced into some Healthcare Equipment stocks.

We have a new Healthcare Equipment Watch List (accessible via the Portfolio Page), which is meant to prioritize our time. We’re likely to spend more time on companies for which we don’t need to factor in a ludicrous “revenue growth we need to believe” number. Check out the last column:

Are these revenue growth numbers achievable? That’s what this Worldview piece is about – to put some context around volume growth guesstimates when we start digging into specific investment ideas.

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