Investing in the future of healthcare

Middlefield’s Strategy for Unlocking the Healthcare Industry’s Growth Potential

M-Asset

The healthcare sector has become a hub for cutting-edge advancements that are not only transforming patient outcomes but also creating enormous growth opportunities for investors. With AI stepping into the spotlight and the healthcare industry teeming with breakthroughs, the question isn’t if these innovations will disrupt the industry, but how soon – and how much.

In a recent roundtable discussion, Dean Orrico, president of Middlefield, was joined by Dr. Richard Evans, founder of SSR Health, and Rob Moffat, portfolio manager at Middlefield, to dissect the healthcare sector’s trajectory. The conversation covered everything from AI’s evolving role in healthcare to the meteoric rise of GLP-1 drugs.

Full upside potential in an attractive sector

Middlefield’s Healthcare Dividend ETF (MHCD: TSX) fully leverages breakthrough healthcare innovations, such as GLP-1s, in contrast to covered-call strategies that limit potential gains through options writing. This approach allows investors to benefit from rapid stock price increases, positioning MHCD to take full advantage of a market that generously rewards companies making transformative healthcare advancements.

Moffat, who manages Middlefield’s healthcare-focused ETF and the Middlefield Healthcare Dividend Fund: (FE: MID325 / F Series: MID326), emphasizes the importance of asset allocation in navigating the complexities of the healthcare sector. While many investors concentrate on picking individual stocks, Moffat points out that identifying the right subsectors is just as crucial, especially in a highly regulated field like healthcare. “Healthcare can be challenging from a regulatory and drug-pricing perspective,” he says, crediting SSR Health’s guidance with helping Middlefield achieve the optimal asset allocation.

Key Reasons to Invest in Middlefield’s Healthcare Dividend Fund

Global diverse

 

Diversified global exposure: Access a portfolio of leading healthcare companies providing a balance of defensive stability and innovative growth

 

Tax-efficient monthly income: Enjoy consistent, tax-efficient distributions, ideal for income-focused investors

Strong performance in good times and bad

 

R&D-driven growth: Benefit from companies at the forefront of healthcare innovation, driven by significant investments in research and development

Middlefield itself has evolved considerably since its founding in 1979. Initially focused on real estate development and financing, it has since become a diverse asset management firm with portfolios spanning real estate, energy, infrastructure, innovation, and healthcare.  Within this wide scope, healthcare has emerged as a cornerstone of Middlefield’s investment approach, driven by the sector’s resilience and growth potential. As a result, MHCD is the largest actively managed healthcare ETF currently trading on the TSX. The fund’s success is largely attributed to the team’s ability to respond to market trends and dynamically invest in high-growth areas.

The resilience of healthcare

Healthcare’s reputation as a recession-resistant sector is well earned. “Healthcare products and services are something people don’t have much choice in consuming – whether it’s medication, hospital procedures, or regular doctor visits,” Moffat explains. This inelastic demand, where consumption is largely unaffected by economic conditions, is a key reason healthcare tends to outperform during downturns. Equally important is the fact that healthcare costs are typically paid by governments or insurance companies, not the end patient. “Because healthcare is covered by third parties, it’s not included in consumers’ discretionary spending decisions,” Moffat adds.

This resilience has been demonstrated time and again. During the past three major recessions – in 1999, 2001, and 2008 – healthcare was one of only two sectors (the other being consumer staples) that managed to grow earnings, while the rest of the S&P 500 saw declines. Yet, despite its relative stability, many Canadian investors remain underexposed to healthcare, largely due to the limited representation of the sector in the TSX Composite Index. While healthcare represents roughly 12% of the S&P 500, it makes up just 0.3% of the TSX Composite, leaving passive investors in Canada with minimal exposure to this essential industry.

“Healthcare products and services are something people don’t have much choice in consuming – whether it’s medication, hospital procedures, or regular doctor visits”
– Rob Moffat, Middlefield

Strategic allocation

Middlefield’s investment strategy emphasizes diversification across subsectors. While technological innovations and drug developments drive growth, the foundation of healthcare’s investment appeal remains its stability, particularly during economic downturns.

Despite its resilience, healthcare can be a complex sector  and requires a comprehensive approach. Dr. Evans stresses the importance of a top-down strategy, which begins with identifying the right subsectors to invest in before delving into individual stock selections. “Subsector balance is at least half of the performance of a typical healthcare portfolio,” he explains, underlining that healthcare’s diversity – from drug manufacturers to biotech firms and medical device companies – makes it essential to allocate investments wisely across subsectors.

In recent years, SSR Health has also become a leader in drug-pricing data, offering insights critical to government bodies, manufacturers, and academics. “Drug pricing drives our business,” Evans says, as it continues to play an essential role in shaping healthcare investment strategies.

The unfolding GLP-1 opportunity

While asset allocation is key to navigating the healthcare sector’s complexity, innovation in biology has presented significant prospects for growth. The rise of GLP-1 drugs offers an unprecedented opportunity to address the obesity epidemic.

With more than a billion people worldwide affected by obesity and 500 million managing diabetes, the potential market is vast. Yet, even with these staggering figures, market penetration remains in its early stages.

“We’re probably in the low-to-mid-single digits of people who are eligible for these drugs that are actually taking them,” Moffat points out, highlighting significant room for growth. He says the major constraint, for now, is supply.

As industry leaders like Eli Lilly and Novo Nordisk invest in manufacturing capacity, demand is expected to surge. “You’re going to see revenue grow in lockstep with increased production capacity,” Moffat says. He also predicts that this is only the beginning for GLP-1 treatments. The sheer scale of the addressable patient population and the growing awareness of these treatments suggest that GLP-1 drugs could become one of the most impactful drug classes in history.

The key question is, “We’re talking about billions of people – is that really the addressable market, or are we looking at only a fraction of that over time?”

“If you’re imagining a part of healthcare that’s not impacted by AI in the future, then you just lack imagination”
– Dr. Richard Evans, SSR Health

Dr. Evans believes that is the addressable market.  “We took a highly conservative approach in our forecast, factoring in compliance issues, lack of coverage, side effects, and other potential risks,” he says.  “Even then, we projected $84 billion in annual revenue for the US market alone – without even considering global figures.”

He elaborates that the sheer size of the market is driven by obesity as a root cause of numerous chronic conditions – cardiovascular diseases, kidney issues, and orthopaedic problems. “Addressing that underlying factor solves a lot of problems,” Evans explains. He shares an example of a patient with type 2 diabetes who had been on multiple medications for two decades but, after starting GLP-1 treatments, was off all other diabetes drugs within weeks. This kind of outcome is a key reason why insurers are backing these treatments – they not only improve patient health but also offer long-term cost savings.

Strong fundamentals amid election-year uncertainty

Healthcare’s resilience becomes particularly relevant in times of uncertainty, including in election years. . However, healthcare stocks have historically been volatile during US election cycles due to regulatory uncertainty. Dr. Evans believes this cycle may be different. “Trump isn’t saying much about healthcare, and Harris is framing it more as part of affordability,” he observes, noting that healthcare may not be as politically charged this time around.

For investors, this reduced focus on healthcare from both sides of the political spectrum could create opportunities. Whether the election outcome favours tax reforms or extended healthcare subsidies, the sector’s long-term fundamentals remain strong. Investors who recognize the potential of healthcare to weather political and economic volatility may find it a compelling option.

Middlefield’s Healthcare-Focused Strategies

Middlefield's Healthcare-Focused Strategies

The role of innovation

Middlefield’s healthcare strategy is built on companies with strong research and development capabilities, such as Eli Lilly, whose unique cash flow generation from GLP-1 drugs enables them to invest in their pipeline and develop next-generation therapeutics.

While current valuations for companies like Eli Lilly may appear high, Moffat emphasizes the importance of long-term thinking. “If you look out five years, you’ll see an earnings multiple somewhere in the teens,” he says, highlighting how sustained innovation is expected to drive growth.

Dr. Evans points to the increased application of AI in healthcare. He notes that AI’s immediate applications – such as pattern recognition in radiographs and the use of augmented reality during surgeries – are already making an impact. One promising area is the use of AI to monitor real-time patient data in intensive care units. AI can analyze real-time streams of data from patients, identifying early warning signs of potential issues like pre-myocardial infarctions, enabling timely interventions.

According to Dr. Evans, this is something companies should embrace. “If you’re imagining a part of healthcare that’s not impacted by AI in the future, then you just lack imagination,” he says.

So while AI’s application in drug discovery is still nascent, its potential is undeniable. Early results show the technology is incredibly powerful, but it hasn’t yet fully matured.

 

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