To grow and develop their healthcare systems, many emerging markets are turning to their private sectors, says Ann Gallo, senior vice-president and partner at Wellington Management Company in Boston, Massachusetts. She co-manages the Renaissance Global Health Care Fund.
These developing countries are realizing that healthcare systems that are exclusively funded and run by the public sector aren’t working, she adds, noting they’re coming to terms with the fact that their public sectors “don’t have the resources to do [this]. So [EMs] need to tap into [their] private sectors, and help develop the infrastructure […] that [their] citizens want.”
Take what’s occurring in China, says Gallo, where “the government [has] realized it doesn’t have the expertise, resources and infrastructure within [its] public sector hospitals to meet the demand of its citizens. So, we’re seeing the formation of private-sector hospitals, with the implicit backing of the government in forms of regulation in China.”
One upside, she adds, is “emerging market economies have had the opportunity to learn from the mistakes of the developed world,” when it comes to seeking private funding and support.
Further, private sector healthcare involvement is inspiring innovation. Says Gallo, “In addition to driving growth for multinational companies, this trend is causing the introduction of new types of companies and industries in China and other emerging markets,” meaning more investment opportunities.
For instance, she has invested in hospital companies in the United Arab Emirates because the government there has imposed regulations to spur private-sector healthcare development and growth. “We’ve also seen this play out in Eastern European countries,” including Georgia (a former Soviet republic that’s located at the intersection of Europe and Asia).
Demand is high for healthcare services worldwide—and that will remain the case, says Gallo. She credits the aging global population and the rising wealth of emerging markets. “Demand is […] very strong and stable. Couple that [trend] with the incredible innovation we’re seeing in the biopharma area,” and you can see why healthcare will continue to offer investment opportunities, she adds.
But there’s one challenge: while demand for healthcare services is high, there are limits when it comes to the funding for and supply of such services. So, “cost is becoming more and more of an issue as it relates to healthcare in all countries across the globe. What does that mean for stocks? In our view, you have a situation where the bar […] needs to be set higher in terms of what it takes to get adequate reimbursement.”
Gallo explains, “[We’re] in a world where cost matters more for compan[ies] looking to be reimbursed for new medical technology or new biopharma. The extent to which [a new] drug or device exceeds the current standard of care […] needs to be greater than it has been in the past.” Going forward, she says, if a new drug or device has more value, reimbursement will likely be higher.
As a result, when picking healthcare stocks, she’s looking for “[stocks] that have true differentiated innovation[s] because those are the companies that we do believe will be rewarded for reimbursement. The same [true] holds on the service side. We’re looking for stocks that help us transition from a healthcare world that rewards volume to one that rewards value and outcomes.”