A Sneak Peek into the Next-Gen of Healthcare

     

    Want to prepare your portfolio for the next-gen of healthcare technology? Listen to our Senior Research Analyst, Nina Deka and Director of Sales, Lauren Hein as they discuss how to capture these disruptive trends.

    Webinar Transcript:

    Lauren Hein: 

    Nina, and I are super excited to be here with you today. By way of short introduction. Hi Nina.

     

    Nina Deka: 

    Hey, good morning.

     

    Lauren Hein:

    By way of quick introduction to me, I'm ROBO Global's Director of Sales. I'm going to be kind of moderating my discussion with Nina, who is our health tech, healthcare expert at ROBO Global this morning. I wanted to make sure I put in a quick word for everybody to submit questions. If you have them, we'll try to answer them live. I see we've already got one dialed in here and we also have some ... just so you know, Nina, we had some pre-submitted questions, so people are not going to go easy on you this morning. We're excited to hear from you. So we'll weave them throughout the conversation where we can, just make sure you submit them in through the Q and A box if you don't mind. Okay. So we're focusing today's conversation on health tech and innovation. Nina, why don't you give us a little bit about your background, so we have some context for where you're coming from in our conversation today.

     

    Nina Deka: 

    Sure. So Nina Deka, senior research analyst at ROBO Global and I focus on our healthcare strategy and that's largely because my entire background is around healthcare. I started my career in the healthcare industry, actually, working for companies like Cardinal Health, Becton Dickinson and I started in corporate finance working with post-merger integration, for example, manufacturing inventory accounting, before I transitioned my career toward medical device sales. I was actually a quota carrying sales rep for about a decade before getting my MBA and transitioning to the street. I worked on the sell side for about six or seven years, covering healthcare, IT and services and now, I'm at ROBO, managing the HTEC portfolio. So, it's interesting because my background, it spans healthcare services, diagnostics, med tech and even healthcare, software, IT and digital health and those are basically the types of companies that we invest in, in the HTEC portfolio.

     

    Lauren Hein:

    Awesome. Awesome. Thank you. So, a real professional in the healthcare space. We're lucky to have you. So I want to start really big picture maybe, let's about the long term case for disruption. Let's talk about the runway as you see it for the next decade of innovation specifically in the healthcare industry.

     

    Nina Deka:

    Sure. So I mean, maybe one place to start is to talk about why we even need disruption. What's happening today? Why can't healthcare just stay the way it is, it's perfect, right? I'm just kidding, so we have some real systemic issues. I think a lot of people have noticed in headlines lately that we have a serious healthcare worker shortage. In the US alone, we've lost about 500,000 healthcare workers for different reasons, since the start of the pandemic, whether it's people are ... mental health issues, physical constraints, people are leaving because they're burned out. There's the debates over whether or not they should be required to get vaccination. Sadly, globally, there have been an estimated 100,000 deaths among healthcare workers, stemming directly from the COVID-19 virus.

    Aside from the pandemic and the impacts of the last couple years, we already had globally healthcare worker shortage and that is expected to worsen over the next 10 to 20 years. Meanwhile, we've got an aging population. People are just living longer and so, what we have is the number of people who require care. People over 80 are increasing over the next decade while fewer people are entering the healthcare workforce and more are retiring. So you've got this dynamic, the confluence of which lends itself to medical error and as it stands, medical error is already the third leading cause of death in the United States. These are things that could have been avoided, had certain situations been detected ahead of time. Things like medication error, patients taking two things at the same time, but interact could result in hospitalization for example.

    Then, another issue we have a challenge in healthcare is a lot of healthcares run on legacy IT or even no IT. There's still a lot of paper charts being used around the world and in those countries that have adopted, widely adopted electronic health records, moving paper charts to computers, a lot of that is still basically living on premise systems and not really interoperable with all of the other software that's being used around the healthcare system. So, there's a lot that's just kind of dated in healthcare tech right now, and this is screaming a very compelling need for disruption, for innovation. In fact, that's really the only way forward at this point. The only way to get the amount of care that's going to be required is by increasing automation, better leveraging AI and just all around new innovation. So it's a really exciting time to be looking at the space.

     

    Lauren Hein: 

    Okay. So people are asking about the cost of health care. How do you see advances in technology impacting the cost of our healthcare?

     

    Nina Deka: 

    Well, I mean, there's a lot of ways to look at it. So if you think about an ER visit, for example, an estimated $500 for an ER visit. Well, if you live somewhere that is outside of a large city, there might be limited access to a physician. It might take a while, maybe it's a Saturday and you have a child who needs a prescription refilled for asthma, for an inhaler and there is no nearby doctor available or an urgent care facility, so people go to the nearest available place, which is often an ER. That's $500 for something that could have been resolved now through telemedicine. Now that telemedicine has largely been adopted, there is an example of how for a $35 visit, enter your credit card number into the phone or into your app and boom, you've got a prescription waiting for you 15 minutes within your nearest pharmacy.

    So that's one example. Another is how, if you have a medical procedure say, where you're in the OR. You're having a procedure done that results in the wound ... when they close up after the procedure, the wound doesn't heal properly. Maybe the patient gets an infection. Maybe they wind up back in the hospital system. That readmission is also very costly. That could be tens of thousands of dollars that something could have been avoided. There are are ways to deploy technology to avoid that. For example, with surgical robotics, where you have smaller incisions and everything is more automated and more tightly controlled, less room for variation and error. When you can deploy tech like that, you can reduce the risk of somebody being readmitted and then take tens of thousand dollars out of the system.

     

    Lauren Hein: 

    Thank you. Okay. So we talked about the long term case and the need for disruption in the healthcare sector specifically. Let's talk about next year. What really excites you a little bit more near term. Maybe some companies, maybe some technologies that you think are like here and ready right now?

     

    Nina Deka: 

    Well, interestingly, we actually ... and for the people on this call, we just published a sneak peek preview of our 2022 trends report specific for healthcare. So, tune in and look out for that in your email inbox and that'll kind of summarize some of the things that we're talking about today. So next year we're really excited. I mentioned surgical robotics already, but in general, when I talked about the constraints of the healthcare system and how they've dramatically been impacted by the pandemic, the need for automation is dire and so, we do expect more deployment of things like robotics and not just in the OR but also in areas like the pharmacy. Think of a pharmacist who has spent years getting a pharmacy degree. That's a very costly license and form of education.

    A lot of them are relegated to a pharmacy, putting pills in bottles, where they could be upfront in the pharmacy, doing more patient engagement, talking to the patient, asking them what other drugs that they're taking and making sure that they're taking the right meds at the right time to help them get well and not wind up in the hospital later because of drug to drug interaction. Meanwhile, why not take the load off of them, of some of the day to day like putting pills in jars and the administrative work behind the scenes and automate that? There are companies that are doing that like Omnicell, which is a company in the HTEC portfolio, is largely automating that pharmacy process and also taking a lot of errors out of the system. For example, they have not only pharmacy dispensing systems, if you will. It looks like a vending machine in a hospital, in the patient floors.

    A nurse or a doctor can go up and key in their unique ID and then, it'll put out the exact amount of medicine that's required for that patient that helps keep the patient safe. It helps minimize error. It helps reduce the risk of shrinkage because there is an opioid crisis and sometimes there's drugs that disappear. It helps minimize that risk, but something really interesting that Omnicell did during the pandemic, if you think about a health system, so that is where you've got like 10 to 20 hospitals all under one big umbrella. In New York, there's the New York Presbyterian Health System. When you had this large organization, when the pandemic first happened and the hospitals were getting overwhelmed, there were different drugs that people were experimenting with. Let's try this drug and see if this helps. Let's try that.

    When a drug was identified to be useful in the treatment of COVID-19 ... and I don't mean new drugs, I mean like the ones that were already on the shelf to help with symptoms. Well, where are these drugs? If you think about the hundreds of places where drugs can be tucked away around a healthcare system, all the different patient floors, all the different offices, the main hospitals, the remote doctor offices, the building across the street, there were hundreds of locations where these pills were housed during a crisis when people needed them the most. With Omnicell, their software lives in the background can tell you exactly where all of these meds are and where to find them and how to aggregate them and get them to where they're needed most.

    Omnicell is seeing an uptick in bookings because people are identifying, we need to clean up this inventory. We need to clean up this process. We need to automate it.

     

    Lauren Hein: 

    Truly incredible. What else is ... give us a little bit more of a sneak peek into that 2022 trends report. What else excites you next year?

     

    Nina Deka: 

    Well, we've got ... let's see something that a lot of people haven't really been paying a lot of attention to because the pandemic has taken so much attention, is an area in genomics known as spatial biology. So spatial biology, like what is that? Okay, so I'll just give a little background about it, just to catch everybody up, but it's basically, if you think about ... let's think of a smoothie, you take a whole bunch of fruits and you blend them up and you've got a drink and then you look at it and you can say, "Okay, I think that this has strawberries in it. I think I taste banana. It's probably got some oat milk in there," and you think that you know what's in there and you can kind of tell, but you don't know exactly how many to strawberries went in.

    Okay. Now imagine a fruit salad. You can look at it and you can see exactly which fruits are in there and you can see exactly how many, and you can see where exactly every fruit is in that bowl. That is the difference that spatial biology is bringing to the table versus like sort of a conventional method of next gen sequencing. So when you're analyzing, let's say you take tissue out of a patient, you biopsy a tumor, you can analyze that and the current conventional method is that you're looking at, for lack of a better analogy, a smoothie. With spatial biology, it lets you look at the tissue as it stands, all the cells that are in it and then you can tell exactly which cells are involved with not only the cancer mutations, but what cells are sitting next to it and how they interact with one another.

    The reason why that's important is because when a medicine is prescribed to treat a cancer with precision medicine, you want a very targeted medicine that targets a very specific genetic mutation. Well, what if that medicine doesn't work, it was made for that genetic mutation? How come it's not working? That's what spatial biology helps answer. It helps to say the reason it's not thing is because there's these other genes nearby that are interfering with this medicine's ability to work. With that additional information, pharma companies can now truly go after precision medicine in a way that's hopefully going to treat many more people with diseases. It has the promise to go far beyond cancer. It can go into infectious disease, et cetera. The reason why a company called Akoya is very interesting ... so there's a couple companies in the HTEC portfolio that offer exposure to this. One is NanoString.

    They are the market leader in spatial biology and then Akoya is this interesting up and coming player who is gaining a lot of market share in this research that we've described, but the reason why they're particularly exciting is because they are helping to bring scale to this industry. So like over a decade ago, when NextGen Sequencing hit scale, it took off in terms of adoption and it became a multi-billion dollar opportunity. We think 2022 is the year that spatial biology hits that inflection point and really is able to take off at scale and it's because of new products coming up from these needs like NanoString and Akoya. Akoya, stay tuned, is having a spatial biology day that you might want to register for that, if it's the type of science that's interesting to you and you can watch about the new products that they're talking about releasing into 2022. So really exciting stuff there.

     

    Lauren Hein: 

    That is very exciting. Can I have you pivot to talk about robotic surgery and robots within the healthcare system? I have three questions that have come in specifically about robotics. Let me ask you, let me ask you the first ... let's frame the first one with who are the major players? Intuitive Surgical will obviously probably be first out of your mouth there, but who else is maybe up and comers and then, we also had a question about Intuitive Surgical be able to compete with smaller competitors or anyone else that you see coming behind them in the ranks.

     

    Nina Deka: 

    Sure. Well, so I think the answer to whether or not they can compete is hands down, yes. They are not only a pioneer and a world market leader in surgical robotics, but they've got years ahead of the other players. That doesn't mean that there's not room for other players and new entrants and they continue to innovate. They continue to be on their own next generation and make their own technology obsolete. So they affect their biggest competitor, which is what makes them such a strong market and technology leader. They have a very interesting new tech coming out that moves them kind of up the body. So right now they focus heavily and they're the market leader in sort of general surgery procedures that take place around the abdomen, like prostatectomy, things like that.

    Now, they're working on a new technology that is called Ion and this focuses on the lung. So if you think about lung cancer and finding a tumor ... and we talked earlier about precision medicine that's all about not only finding the tumor but getting enough information about the gene that's causing the cancer to then be able to deploy the right type of treatment. That's really hard to do if you think about a lung, because this tumor is probably somewhere in a very hard to reach place. So Intuitive is working on something very exciting that is able to ... early data is showing that they can not only get to that tumor, but get enough information out of that biopsy. that's almost all the time helping a surgeon or the doctor come up with the accurate diagnosis. Imagine if you went and did the surgery, did a biopsy and you didn't get the information you needed, would you have to do it again?

    Meanwhile, the cancer is progressing. So the key here is doing it the right time and get the best information you can right away. So that's really exciting stuff coming out of Intuitive and then there's other up and coming companies like one called Vicarious Surgical that people are keeping an eye on and they're going to help make it so that when they do the incision for procedure, it's very, very small. So we talked earlier about the ability to recover quickly from these type of procedures. Making a small incision is a part of that and only one point of entry in order to make that procedure happen versus coming in all over the place. They're not alone. There's a lot of other companies that are innovating. If we move to other sections of the body, there's orthopedic surgery that can be used where surgical robotics is being deployed.

    HTEC provides exposure through Stryker. Stryker has technology, and they are the market leader for orthopedics. They basically help minimize error for surgeons so that they don't cut off too much of the bone or go too far into the wrong place. It adds a lot of like a dummy proof capability. Not that the surgeons need it, but it just helps ... for example, if you're training a new surgeon on how to do an orthopedic procedure. I mean, that's tricky to do because these are errors you really don't want to make of like cutting the wrong part of a bone. So if you have a robot that helps guide and minimize those errors, that's what makes striker the market leader in that space, and we expect there to be continuing entrance. There are other players in this, not all of them are in the HTEC portfolio. Medtronic has been working on a technology to compete directly with intuitive surgical. So, we'll see more to come.

    Another company in the spine space is GMED, Globus, I think they're GMED. They're in the HTEC portfolio as well. So we have some exposure to this exciting space and from a valuation perspective, a lot of these like sort of ... these types of OR related, procedural volume related med tech companies, weren't getting a lot of attention over the last couple of years. So, it's great to have exposure to that in your portfolio as hopefully fingers crossed someday, we come out of this pandemic, people go back to scheduling surgeries. These are the companies that are going to be very well positioned for growth.

     

    Lauren Hein: 

    Incredible. So obviously surgical robots or any sort of robotics within healthcare is just a small subsector within the health tech index, HTEC. Can you talk about the index methodology, maybe speak to that a little. How do you actually determine what companies get included? What companies don't get included? Obviously we're watching a whole lot of them or you're doing a lot of analysis on a lot of companies that don't make it in. So talk about our index methodology please.

     

    Nina Deka: 

    Sure. And actually this ties a little bit to your question about, there's a page ... Erin, if you could shift to the slide that talks about kind of the future, five themes. Lauren, you had asked earlier about like, where do we see the future of healthcare? I probably didn't go deep enough into that but I guess it relates to this a little bit. These are the areas where those problems I discussed earlier, we see them being addressed through innovation across these kind of five themes like digitization. So I talked about how a lot of healthcare is running on like legacy IT. We expect to see more digitization and more use of things like wearable devices. The data that comes out of that can be communicated to doctors in a way that maybe a patient who doesn't see a doctor every day is able to get that communication across on a more regular basis.

    Then other themes like consumerization, this is where people are shopping for healthcare more than they were before. People, back in the day, used to just rely on referrals. Go see a specialist. Here's the one I want you to see. Now, people are actually shopping online and looking for quality services and choosing their doctors. So these kind of personalization is another one, we already talked about precision medicine, prevention is another area, like how can we keep people from getting sick to begin with? What can we do to keep people well. We're seeing employers increasingly offer things like gym memberships, building a gym, right in the office, having a primary care office right in an office building. There's a lot of ways to prevent illness and then also decentralization.

    We're seeing a lot of healthcare moving out of the four walls of a hospital to lower cost settings, like people's homes. So when we think about how do we invest in this space, this is how we break down HTEC and now, you could jump back to the slide, Erin with the nine sub sectors. Yeah, so this is how we break down HTEC. We think about like, where are the areas that really help fill those unmet needs in those five things that I just discussed. So, these are the nine sub sectors where HTEC is diversified. We've got data analytics. We've got telehealth, regenerative medicine, genomics. These are the areas that we believe represent the next decade of growth. So when we look at our methodology and how do we want to invest in these space, we look across these nine sub sectors and we're constantly evaluating all the companies that operate within them.

    What we're looking for specifically to our portfolio is market leadership, technology leadership. So if it's like the number one, number two player, they're going to get a high score. We've got a proprietary scoring system that we use, we look at how they invest back into their business. Are they acquiring other companies that are complimentary, that are also doing something cutting edge? So the way that they invest is also a metric and revenue purity is really important. If there's a really innovative company, but only like 20% of what they do is healthcare, they're probably not going to get into the portfolio. So we use these different metrics. We're looking at valuation. We have some fundamentals like EV to sales, debt to EBITDA ratio for our evaluation and our risk mitigation standpoint.

    We look at all this together. We put a score on. We look across the universe and we say, okay, like if this company has a high enough score, let's put it in our system. We have a proprietary data base where we track all of this, and then we have a pretty extensive committee voting process. So for example, if there's a company we're looking at, I mentioned Akoya Biosciences earlier. That was a new inclusion, a couple of quarters ago. We went through, we analyzed all kinds of genomics company. We dug deep into spatial biology. We thought this is a hot trend. We've got NanoString. Where else could we get more exposure? We met with the companies. We identified Akoya as an emerging leader in this space and a tech disruptor. We have like a team of not only research analysts, but also a team of advisors that weigh in.

    These people are the ... ROBO Global has an advisory board that includes people that are kind of like the who's who, if you will, of our thematic strategies. Technology like robotics AI, health tech. There are some global leaders and thought leaders in that space that weigh in. Then we have a committee process. We basically explore the company, do a fundamental evaluation and then have an extensive voting process, and if the company gets voted in, we do continue to monitor it and I know somebody had asked the question earlier about like, how long does a company typically stay in? We are looking for the long term potential. So we're not looking quarter to quarter. This isn't like a short term where healthcare as the next 10 years of disruption. So we're looking at like three to five years out and once ... it's such an extensive process to bring a company in that we do try to keep them in for a while.

    If they get kicked out, it's because they have violated a metric, like EV to sales ratio or one of the other fundamental metrics or their score is coming down. Maybe we had to downgrade them because they're losing market share so rapidly that they're no longer our number one market leader. So, that's kind of how we do the whole process and that's how long a company will stay.

     

    Lauren Hein: 

    Off the top of your head, we had a question about portfolio turnover. Do you have a ball park on an annual basis, what the HTEC turnover ... index turnover looks like?

     

    Nina Deka:

    I don't know that number off the top of my head. I only know that it's slow. So it's rare that a company would come in and leave anytime soon, but we can probably, if we have the contact information, get back to that individual.

     

    Lauren Hein:

    Sure. Maybe if we can go to the top holdings page, would love to talk a little bit about our top 10 holdings and what really differentiates these companies, maybe it's something specifically grabs you to talk about on this list, maybe why they are in the top, as opposed to the bottom list, just talk about how we get here.

     

    Nina Deka: 

    Sure. One of the ways that we get here, interestingly, is back to our methodology, we use a modified equal weighting. So we have that scoring system that I mentioned and of the range of scores that are possible, if a company is on a higher end of the range, they might have a slightly heavier weight than a company that's on the lower end of the scoring range. That being said, because it's basically equal weight, give or take, no company is more than a couple percentage points typically of the entire index. So it's really truly diversified and that is kind of unique to our strategy, where you'll see companies emerge, you mentioned the top 10 here, it's throughout the quarter. We have a quarterly rebalance process. So throughout the quarter, two thirds ... actually about half of the portfolio is small mid-cap and these are health tech names and they move a lot.

    So, you've got some that kind of gained a bunch during the quarter and some that didn't and that's how you'll get to where we're at. Where if you look here, you've got iRhythm, it's like three and a half percent of the portfolio as it stands and that's until the next rebalance. So when you look at who's on top, it's because they had a strong run this quarter before this next rebalance comes up. I read them in particular, they reported some great news. The stock was actually down last quarter because there was concerns that they would not be reimbursed as much as they used to be for ... the healthcare workers who use their devices wouldn't be reimbursed enough. This quarter there was news saying that they're going to get more than they originally planned for. So big bump in revenue there and the stock reacted to that. Vocera is crushing it. They have been throughout the year. This is another company that's stepped up during the pandemic, but has like really cool technology in general.

    They sell a badge that people can wear. So it's a wearable device. It is completely voice activated and they can speak ... healthcare workers can speak into ... Cool. The badge is now, you can see it on the white jacket of one of the healthcare workers and then, around the neck of the nurse with the scrubs or the physician. Anyway, so those two represent this technology. The reason why this was really helpful during the pandemic is because you don't have to touch it. You can just speak into it and when a healthcare worker was in an isolation room with a patient with COVID, remember the crisis with the PPE, there wasn't enough gloves and gowns. So to put this precious equipment on and then go in and work with the patient, let's say you have to go ask a question of somebody not in the room. When you leave the room, take everything off, go find the healthcare worker and then put everything back on again.

    We didn't have the supplies to enable that. With Vocera, they could just speak into the badge and say, "Hey, I'm with this such and such patient. We're in the isolation room. Don't come in, but can you help us figure out what we need to do next?" So anyway, they made a lot of headlines because they were able to step up and help with something very critical. In general, Vocera not only provides this communication but the background software capabilities that help manage basically healthcare. So if you think about alarms, okay? Alarms are like, "Beep, beep." They're all over the place. I mean, I already have with my phone, so many alarms that I get ... like I start to tune it out after a while. Well, in healthcare, these alarms might be critical. They might be like ... It might be a matter of life and death.

    So imagine having so many and the healthcare worker shortage. So now you've got like too much noise. You're overwhelmed as it is, and there's not enough staff. Vocera's technology will help organize those alarms and only send the beep or the alert to the healthcare worker who needs it, so the whole room doesn't have to listen to it. The one person who can deal with the patient, who's assigned to that patient will get the alarm and only for the patient who's at risk. So by organizing this behind the scenes, it helps automate the workflow and helps manage it in a way that's better for the quality of life for both the doctor, nurse and the patient.

     

    Lauren Hein:

    Okay. Not one of our top 10 holdings, but people are really curious about CRISPR. Stocks is struggling a little bit this year. CRISPR is included in our HTEC index. So do you have any thoughts on both the company, and also we did have a question specifically about CAR-T technology.

     

    Nina Deka: 

    Sure. So CRISPR is basically something that everyone should be involved in because it's what the researchers are using now. Anyone who's in school doing research and going to graduate soon and going to continue to be a scientist and do more research, they're all using CRISPR. It is more efficient. It's just a faster way to conduct the science and then analysis and get answers. It's faster, it's low cost and so, it's really kind of taking the place of so many things before it, like other conventional gene therapy methods. So, it's something where you ... you definitely want exposure to it and there's a handful of companies, less than a handful of companies that are leaders in this space. So, it's here to say, it's not going anywhere and the reason why it's particularly exciting with therapeutics is because we're already seeing some breakthroughs, like over the last year, we've already seen ways that CRISPR can work where ... and just to like maybe level set, CRISPR is essentially the ability to edit a gene.

    So think about a pair of scissors. There's something on a gene that shouldn't be there and it's causing a problem, it's causing a disease. Okay? The CRISPR-Cas9 technology is basically something that can go in and snip out the problem that's causing the issue and then, help to cure the disease and there's two ways to do this. You can either take the sample out of the body and make the snips and do what you need to do and then, put it back into the patient or you can actually inject the technology into the patient and see if it'll work on its own. The ladder of that, which is ... it's just far more scalable is something where we've already seen successful data. So, some really exciting things happening in that space and also, there's going to be some abilities to deploy CRISPR, potentially down the road with RNA, everything I just described is like with DNA, but there's also potentials to do things with RNA.

    So, there's so much more to come in that space and it's not going anywhere, so everybody should keep an eye on it for sure.

     

    Lauren Hein:

    Okay. I'm going to ask you to zoom out a little bit and talk about the valuations of the kind of the index as a whole. Also, maybe talk about how much of the portfolio is what you would consider growth versus value. That's a question from our audience and how you really look at the valuations of these companies when you're deciding on the weightings.

     

    Nina Deka: 

    Sure. So from a valuation perspective ... so, when you're looking across using our methodology across the world of innovators, you're often going to have companies that are smaller, which is why about half of the portfolio is small mid-cap names, but what you also have are companies that are not yet profitable. So, often in our other sectors, maybe forward earnings or EPS in general is the way that people look at evaluation, but we believe that the best metric to use for HTEC is the EV to sales ratio, the forward EV to sales ratio, because that's how most of these companies trade. So, when you look at the forward EV sales of HTEC, it has come in and it's actually less than five times right now, 4.45 times EV to sales over the next 12 months.

    So, when you look at like, why has it come in, just there's so many fact right now. Concerns around inflation, overall. When the tech industry takes a hit, so does med tech, because it's very adjacent, because these are essentially mostly tech names. So the right way to look at this from a valuation perspective is for to EV sales and just for comparison a year ago, it was trading at like seven times. So, in our view, this is a phenomenal entry point. For technology, that's here to stay and going to be disruptive over the next decade. Then, and so about 31% of the portfolio does not yet have earnings. So that's why kind of that's the right metric to use. What was the other part of your question?

     

    Lauren Hein:

    The percentage of companies that are showing earnings now was actually one of them, and then, the other question was about the PE ratio and how much of the fund would you consider growth versus value, which I think you were adjacent to that in your answer, but do you have anything you'd like to add there?

     

    Nina Deka: 

    No, just for the most part we do ... I might have a metric here about the growth rate of the index. I don't know if I have it handy. I could look for that later but overall, the portfolio ... I think the last time I checked, it was something like a 10 to 12% growth. It is a double digit top line growth in general. So anyway, I would say as a portfolio, think of it as growth, but there are definitely some names that could be thought of as value that are in there. These are kind of the more companies that have been around for a while. They do have earnings, they're single digit growers, companies like ... even Boston Scientific, Edwards Lifesciences. Even those companies when it comes to our scoring system and our methodology, what we're focused on within them are the growth and disruptive areas of what they do. So our scoring system will capture those portions of those companies accordingly, but we do have exposure to value names.

     

    Lauren Hein:

    If anyone wants follow up, I'm just going to tell you my email address. It's lauren@roboglobal.com. You can send these questions directly to me. We're happy to answer them and get you some more metrics. So Nina regarding rebalancing, you kind of talked in that last answer just a little bit about your scoring system. If a company has a strong quarter or strong series of quarters, someone is wondering why we don't just continue to hold that stock or increase the waiting in that company every single quarter, instead of maybe pairing back some of our winners. Can you talk about the rebalance process for the HTEC index?

     

    Nina Deka:

    Sure. So we do hold to our modified equal waiting methodology. So the rebalance process keeps us true to that and that's to help really diversify exposure and leverage if there's something really incredible going on with one of our mid, smaller cap names, why shouldn't the portfolio performance reflect that. So really kind of everyone gets a fair chance in our portfolio, and then, when it comes to pairing down, we just ... I know that there's some strategies that will do like a semi-annual rebalance process but ... I mentioned earlier, like we've got some movers in here when you have this level of small mid-cap exposure, the level of volatility that that brings to the table, if we don't do the rebalance of the frequency at which we do, we kind of ... we do run the risk of a company running into the three, four, five plus percent of the whole portfolio and that strays away from what we're trying to do.

    So, that's kind of why we do it at the frequency we do, the benefit of that is that there's a lot of movement happening, particularly in healthcare right now. There's a lot of companies that have gone public. There's companies that get taken out. So the quarterly process also gives us a chance to bring the new up and coming, most innovative companies in and it forces us to keep it fresh throughout any given year. So that's kind of the reasoning behind that and then, why? Okay, so think about ... I mean, last year we added Moderna to the portfolio. It's no news to anyone that that's been a monster stock, right? So as that continues to grow, again, we don't want Moderna to be like 9% of the portfolio, right? So we do trim it in line with our methodology and in effect, we are always selling high and buying low.

    Then in terms of the waiting, if a company let's say doesn't meet all of our criteria, it might only come in at half weight anyway, and then let's say it, the EV to sales comes back into our range or the debt to EBITDA ratio. These types of metrics will enable it to be full weighted. So that's kind of how we think about things and I hope that answers that question.

     

    Lauren Hein:

    Certainly. All right. I'm going to hang around a little bit. The first question that we had was asking about your opinion on the entrance of large retail or maybe some large tech companies into the healthcare space. Specifically, we had an anecdote here where one of our attendees visited a super Walmart this week and there is a healthcare clinic attached. So both big retail and also mega tech. Do you see them entering the healthcare space more and more?

     

    Nina Deka:

    Absolutely and there's no reason why they shouldn't. I mean, Walmart is already ... the thing that they have is that they're already kind of like so deeply embedded into the life of a Walmart customer. So that's where our customer goes to get not only their hair products, but their meds, their groceries, their toys, their Christmas shopping but they're already there all day long. Why not while you're there, get your flu shot? Why not while you're there, get your blood pressure checked out? I mean, that's what Walmart wants to do, same with CVS. They're already in the neighborhood. They already have this footprint and people coming in, the foot traffic and they're already healthcare providers. They're already providing pharmacy services, but, but while you're there, why not completely round out the service capability?

    Also, we bring up CVS, they're not only doing like Walmart offering sort of these primary care type services, but they're also taking one step further and offering telehealth type services through a company portfolio, Teledoc. So, there are ways that these large retail big boxes can do more and deploy technology and there's no reason why they shouldn't. There's absolutely room for them to operate in this space and they should leverage their existing client base. Why not?

     

    Lauren Hein:

    We're going to ping around a little bit and talk about some of the underlying technologies within HTEC. Do you have any thoughts on telehealth? T-doc is kind of on a slide here in the back half of this. Do you have any thoughts about the stocks specifically or maybe just talk a little bit about digital and telehealth generally in the outlook there?

     

    Nina Deka:

    Sure. So Teledoc is really exciting and I think there's a ... the stocks come in as people have noticed, but I think that investors are missing a really interesting part of the story. So if you take a step back, Teledoc is the pioneer of telemedicine. The reason they were able to deliver the millions of doctor patient visits remotely during the pandemic is because they had already done the legwork and laid that infrastructure to make that happen. They didn't have a capacity issue when their volume went eight times their normal volume level. They had already built ... ready for that capacity, well and ... back around the time of their IPO, 2014, '13. So they've been ready to go for this wave, if you will, of telemedicine visits, but that's only one small part of what they do.

    They are looking to basically be the virtual front door of everybody's healthcare and they just announced ... yeah, they had an analyst day, if you will, and they just announced a new tech device or a new application that they're piloting right now, and I think this is going to be game changing. So basically it's an app, a patient can use it and it will help them not only manage their care. So let's say they have diabetes or hypertension, it will give them very until nudges like, "Hey, don't forget to check your blood glucose level," or whatever metrics being measured. If the patient's reading goes out of a range and it's something critical, they'll get a phone call. The device will actually ring and it'll say, "Hey, we've noticed you're out of range. What's going on? Do you need to take a walk?"

    "Do you need to drink some orange juice or do you need to come into the emergency room?" So, what they're effectively doing is helping a patient manage their care when they're not face to face with a doctor, right? So this has been through M and A, like they acquired Livongo, it was the largest digital health acquisition in the history last year. So now with this new technology, they can monitor people with their chronic illnesses. What they can also do is help schedule appointments, "Hey, I need my routine checkup or hi, I have sinus infection." They can do all that from their device. So, what it's doing is it's basically being the one stop place on a patient's mobile device or computer that will help them manage all of their healthcare needs while nudging them toward ... I remember I mentioned earlier, prevention was going to be a big theme while helping them manage disease so that they don't get sicker.

    All of this is going to be paid for by their ... either their employer or their health insurance company, who is essentially going to drive down a lot of healthcare costs by keeping these people from getting sick or keeping them from getting sicker. So really exciting technology, sorry, there's like a thing that just flew by. Really exciting technology that they're deploying and I think that the broader investor community is kind of missing that. What people are paying attention to is the number of new users, telemedicine is already here, everyone has adopted it. We don't need to count new users anymore. Now let's count, if you're a user, how many more products you're buying and using within one platform, because that's going to be the growth driver.

     

    Lauren Hein:

    Okay. I want to ask you about AI, so the impact of predictive analytics, cognitive pattern recognition, other sorts of artificial intelligence applications within healthcare, what do you think the impact can be, are there any specific companies that excite you that are doing new and exciting things?

     

    Nina Deka:

    So many, I mean, if anything, companies that are not looking for ways to leverage AI to do what they do better are probably going to fall behind, because it's necessary. When we talked about genomics earlier, there is so much data that comes out of even looking at one patient. If you look at a sampling of patients, then there's orders of magnitude more data, and it's hard to know when you have a huge amount of it, what to look for, but if you can deploy mean machine learning and data analytics to look across at a ton of dataset, you can start to uncover things like, for example, "Wow, we're looking at the genetic composition of 500 people that have diabetes," and we found this common thread among them that we didn't even know existed. There is a specific gene and all of these people have this type of diabetes.

    Maybe now, we should start looking for that gene to see if other people might be at risk of this. So that's just one example of how you might not have had the ability to do that type of analytics or it would've taken many people several months to digest all that information to really tie it together. When you have all that information, you could take it one step further and say, what drug can we make now that will help this very specific subsect of people, and that's the kind of information that pharma companies are paying for because they want to not only develop a drug, but they want to do it quickly because it costs less them less. So they get a better ROI when they can have more information and get a drug out the door and commercialize faster. So that's just one example of how AI and machine learning can help.

    It can help guide ORs and the surgeon who are using robotics. It can help platforms, like when you're trying to find, let's say, population health management. This is where you've got a zip code, if you will, of people and you want to get ahead of their costs and you want to say, "Okay, who are the people that are going to drive the next 80% of healthcare costs and what can we do to prevent that?" I know, let's run some analytics among this population at a hospital and say, who are the people, who are women over the age of 40 that have never come in for a mammogram and let's set up a campaign in the neighborhood and try to drive people to get screened for breast cancer. Even, let's target people who might have had a family history and really get them to come in.

    So, there's ways to do analytics that are going to help us prevent illness and lower overall medical costs by using AI as well. It's going to be everywhere. People should expect to see it and if they don't see it somewhere, wonder why and wonder if there's another company that can invest in that is using AI, because they're probably going to be able to do it better, fast and cheaper.

     

    Lauren Hein:

    Okay. We have someone that's curious, your opinion or a short discussion about Natera, obviously an HTEC tech ... it's an HTEC tech index.

     

    Nina Deka:

    Yeah. Natera is definitely ... I think it's been like kind of one of our top picks for a little while and continues to be. This is a company in our genomics subsector and they are a market leader in prenatal testing. So this is what put them on the map. People who are pregnant can have their blood drawn, and by analyzing that blood, they can detect birth defects of the fetus. The conventional way of doing this is by waiting until the fetus reaches a certain age, say 16 weeks and they can put a needle into the amniotic fluid and that comes with some risks, and you can do a genetic testing that way, but this way, it's much less invasive. It doesn't even touch the fetus. So, this drawing blood doing these type of genetic tests is called liquid biopsy.

    So, Natera is a leader in that, but what they're doing, they're doing other things now with liquid biopsy. So cancer, if somebody's been ... undergoing treatment for let's say colorectal cancer, Natera has an FDA approved liquid biopsy test that can detect whether or not the cancer is recurring, did it come back? They can detect it up to eight to nine months sooner than conventional methods. Yeah, this is in the same kind of field. This is a chart that we borrowed from Foundation Medicine, a division of Roche. This is another company in the HTEC portfolio where we've got exposure to cancer testing. So, if you look here at the different stages of a patient's cancer journey, if you look at the red kind of humps there, the red hills, those represent kind of today, conventional methods of cancer testing.

    There's a tumor and someone will biopsy tissue through a surgical procedure and they'll analyze it and then, they'll say, "Hey, based on the information we have here, what kind of treatment should we give or does a person even have cancer?" So if you look kind of, like in that later stage, you've got another kind of the red hill, this is where you have to biopsy the patient again, to see if the treatment they've been undergoing is working. So think about the ability rather than doing another surgical procedure and waiting for that time to just go in routinely, get your blood drawn and see if the cancers come back that way. So much lower cost and I think what a lot of investors are missing with the Natera story is that this is a customized test.

    So they create the test, it costs a couple thousand dollars and then there's a reimbursement, which is really exciting. They don't make that much in profit it on that first test but then once the test is made, it doesn't cost them much to ... the test is done, so the cost of that test now for Natera is very low, but the reimbursement is the same amount. So if they get like two to three grand a test, and the first time it goes toward making the test, but each additional time, it drops straight to the bottom line, we could see a little ramp up there in profitability. Now, keep in mind, this is a very unique subsect of patients. So we're not expecting tens of millions of people to all of a sudden having these tests done, but I think it should be impactful to the bottom line, and that's just one interesting thing that they're doing.

    They're also doing genetic testing for transplants as well. So, definitely a market leader and a tech disruptor.

     

    Lauren Hein:

    Okay. We're very close to being at an hour. So I want to acknowledge, there are still some questions in the queue that we didn't get to. If we have your information, we'll try to get back to you directly with answers to those questions. Nina, you have 60 seconds, any kind of concluding thoughts or any final thoughts from you on the space or the outlook for 2022, anything at all?

     

    Nina Deka:

    Absolutely. Yeah. I think that we really wanted to help explain the kind of, why now, behind why get involved with healthcare innovation. So I just really wanted to reiterate that, that people think like, "Oh, yeah, I hear about all this cool technology but I already have exposure to healthcare." Often a person's portfolio might not have a lot of the names that we just described because a lot of other healthcare portfolios are cap driven. So, what you have as a result there, is a lot of kind of large cap pharma companies. You've got a lot of health insurance companies, HTEC has very little exposure there and a lot more exposure to all of the other ... kind of those nine subsectors that I talked about. So this is actually kind of complimentary to a lot of portfolios that exist today.

    So it wouldn't be a matter of like, "Oh, we already have healthcare." It's more just, do you have this high growth kind of healthcare tech capability? Yeah, thanks Erin. These green horizontal bars represent HTEC and as you can see, they're kind of more distributed where we've got waiting in more of these other areas that we consider to be kind of the next decade of growth, if you will, whereas the gray bar, if you look at the top, it says pharmaceuticals. That's like your more standard healthcare index, if you will and you'll just see a lot more exposure in that like large cap pharma. So this could be quite complimentary and also give people an opportunity to get involved with some of this really exciting stuff that we talked about today. Anyway, Lauren, thanks so much for your time and thank you for everyone who joined and all your great questions.

     

    Lauren Hein:

    Any last questions you can email me directly, again, it's lauren@roboglobal.com. You can also just go to our website, which is roboglobal.com and you can submit questions or any kind of follow up there as well. Nina, thank you for your time today.

     

    Nina Deka:

    Thanks.

     

    Lauren Hein:

    We'll talk to you soon.

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