Fund Manager: Demographic Shifts to Drive Growth in Healthcare

Exorbitant costs, a shrinking workforce and government interference currently define the healthcare sector, and one expert says those drivers are also affecting investment in the space.

Gerry Frigon, president and chief investment officer at Taylor Frigon Capital Management, told the Investing News Network (INN) that companies in the healthcare space are facing headwinds that have proven to be hurdles for the industry overall.

However, there is still huge opportunity in healthcare, Frigon said, adding that healthcare firms make up anywhere from 25 to 30 percent of Taylor Frigon Capital Management’s portfolio across its funds.

Taylor Frigon Capital Management is an asset management firm that provides active investment avenues, including mutual funds and venture capital opportunities.

Some of the headwinds and drivers for growth Frigon mentioned are explored in Deloitte’s 2020 Global Health Care Outlook, which highlights an aging population, technological advancements and evolving care models as factors that are propelling the healthcare sector amid uncertainty.

Deloitte’s report also notes that at the federal level, governments are moving the needle by implementing universal healthcare coverage and pricing controls on drugs and medical devices, initiatives that Frigon said make circumstances more difficult for players in space.

During an interview with INN, Frigon spoke about his predictions for healthcare moving into 2020, as well as how he thinks the healthcare world will evolve in quickly changing conditions.

The following interview has been edited for clarity and brevity. Read on for more of what Frigon told INN.

INN: I know the companies in your portfolio span several different industries, but I want to narrow in on healthcare and ask about what trends you’re seeing in the healthcare segment.

GF: One of the things that we get concerned about is to what extent is government involvement in healthcare going to make it difficult for our companies. There’s no healthcare company that we look at that we don’t also look at through the lens of, “Okay, how could this possibly get messed up as far as reimbursements go, and if we were to end up in a situation where the government is buying everything.” For us that’s always an impediment.

The flip side of that is the positives in healthcare; there are, and continue to be, significant breakthroughs, both from a direct discovery biopharma standpoint as well as from a medical device technology standpoint. That, coupled with the aging baby boom that’s still with us — it’s a massive piece of the population that’s needing more and more healthcare both from traditional biopharma as well medical devices with things like knees and hips and now shoulders.

So there’s kind of competing trends there with respect to the uncertainty over government involvement in healthcare, but offset enough for our purposes that some of these breakthrough technologies are worth being invested in.

INN: What are some of the most critical growth drivers in today’s healthcare market?

GF: Demographics continue to be the driver, but I think it sort of feeds on itself. I think as you see more breakthroughs in medical technology, it’s a little bit of a chicken and egg thing. What comes first, the aging population and that obvious demographic, which uses more healthcare, or just the general growth of the health of the economy that allows people to be spending more on healthcare?

That’s actually something a lot of people don’t think about. There’s lots of discussion about how much Americans spend on healthcare, and it’s this huge, massive portion. Some of it is the inefficiencies of the way things are priced nowadays, yes, but the other aspect of it is, “Hey, we’re doing so well as a society, as an economy, that we can afford to spend more on healthcare.”

I think it’s a combination of demographics and medical breakthroughs that are happening because there’s this demand for being healthier in a society that is able to do that, as opposed to worrying about how they eat or how they put a roof over their heads. Now they can start worrying about knee replacements and hip replacements, and people are definitely living longer. It’s not just the sheer number of baby boomers, it’s that they’re living a lot longer and a lot healthier lives, which also contributes to the higher percentage of overall economic activity being dedicated to healthcare.

INN: From a federal level, what kind of challenges are facing firms in the healthcare industry?

GF: If you’re going to get breakthroughs in technology, you need to have some sort of an incentive system, which is what capitalism is. And unfortunately, in the process of getting that done, especially in the early stages of breakthrough technology, those technologies end up being very expensive, and companies are trying to recoup the massive investment that they’ve done to try and get to that point.

I think to whatever extent government involvement serves to stultify that kind of progress is going to really hurt everybody. So the Catch-22 is everybody complaining about how expensive healthcare is, but the flip side of that is, well, we can make healthcare really cheap and we end up with no breakthroughs, we end up with no progress. I think it’s somewhat of a fool’s errand to be running around out there saying that you can mandate the pricing in healthcare and expect that you’re going to get the same level of improvement. The doctors, for example, have been continuously squeezed in the prices that they can get, and we’re ending up with a gigantic doctor shortage.

A lot of these healthcare providers are clamoring for better technology to be able to set themselves apart and to be able to provide the kinds of services that are cutting edge, and the only way to get that, obviously, is with the latest, greatest technology.

INN: With those trends in mind, what are some of your projections for the healthcare sector moving into 2020?

GF: We’re not looking at things with respect to trying to make this call on the next year or two or three. What we’re looking at are companies. What we’re looking for is what are the technology trends that are driving decisions that then will affect the companies that we want to invest in — for example, home healthcare. Much more healthcare is being done at home, we’re finding. In fact, studies are showing that people respond to treatment much better when they’re in their own home.

Another narrative is direct to consumer. Working around what is a very dysfunctional healthcare system right now, direct to consumer is becoming more popular. You have a lot of places in the US, and I would argue most places in the country, where, for example, the emergency room is being used as a doctor’s office for many.

The average person is out there and doesn’t necessarily need to have a run to an emergency room. They may not even need to run to a doctor; they just talk to a doctor via an online web conference and determine whether or not they should run into an urgent care center. There’s lots of new company models that are coming up.

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Securities Disclosure: I, Danielle Edwards, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.