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A year into the COVID-19 pandemic, the notion that our personal health is our greatest asset has never been more true. Kim Parlee talks to Tarik Aeta, Healthcare Analyst, TD Asset Management, about the TD Global Healthcare Leaders Index ETF (TDOC) and the next big areas of innovation in healthcare.
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- We have been living through this pandemic for over a year now. And the attention and the capital that has flowed into health care sector has had many take notice. Here to tell us more on the investing opportunities in a very-fast-growing health care space, Tarik Aeta is back. He's Health Care Analyst with TD Asset Management, and joins us again for this conversation.
I want to start if we could, and just to pull back and get a really big picture, you've noted in a recent report that two of your key drivers of growth in the health care sector are demographics and innovation. I guess we're just all getting older, aren't we?
- Yeah. So when you take a step back and look at the big picture, it's really been two very, very simple things that have driven the strong growth of health care. Yeah, the first is a growing and aging global population. As you can see in this chart, the world is getting grayer, with the global population of adults over 65 years of age having grown at 2.7% annual rate over the last 20 years. As we all get older, we all consume more health care services.
The second driver of growth has been innovation. It's arguably even more important. The reason innovation has been so powerful in health care, just like it has been in the technology sector, is because it opens up new markets where there are unmet consumer needs. For example, in the world of technology, e-commerce and smartphones barely existed 20 years ago, but have since grown significantly, given they fill large consumer needs.
Similarly, in the world of health care, innovations such as robotic surgery, DNA sequencing, transcatheter heart valves, and many new cancer drugs, didn't or barely existed 20 years ago. And with health care companies continuing to spend more on research and development each and every year, the pipeline for those innovations continues to reign really strong and will remain strong for years to come.
We've got a chart here that we wanted to show from one of your reports. But when you talk about innovation, you name some examples. But we see some things up here, genomics, diagnostics and therapies, small-molecule therapies, virtual care. There's just, there is so much.
It's amazing actually, too, because when you think about it, a lot of this has not yet been-- technology's really not hit a lot of parts of health care yet.
Yeah. When we look forward to the next 10 years, yeah, there's really six big themes when it comes to health care innovation. As you mentioned, the first two relate to genomics. As I'm sure everyone remembers from high school biology class, genomics is just simply a fancy term that refers to all our DNA.
Allowing this innovation to accelerate in recent years has been a collapse in the cost. This is allowing innovation such as genomic-based diagnostic, including a big focus on early cancer screening and genomic-based therapies. mRNA vaccines, for instance, are a very good example of that over the past year. Moving along to that third bucket of innovation, it's further advancement in small molecule and antibody-based drugs, with companies really focusing their efforts on cancer, obesity, and mental health.
The fourth bucket I'd call out is virtual care. So this has grown a lot under COVID. But it will continue to grow quite a bit, in the years ahead. The fifth bucket are intelligent medical devices. So this includes everything from robotic-assisted surgery, which is still in the early days. And on the consumer side, also includes things like continuous glucose monitoring, which can monitor your blood sugar 24 hour a day and with those with diabetes, can send alerts directly to your smartphone.
Last but not least, this is an earlier area, but computer-aided drug discovery is an area that can help us discover more drugs more quickly and at lower costs. So it's another area to watch out over the upcoming decades.
- Hmm. So much happening. I'm going to bring up, again, a piece that we brought in from your report that shows just how well the sector has performed. We can see that this is a look at health care S&P 500 health care versus the S&P 500. Some really big numbers there.
But I'm actually going to move on, if I could. I wanted to talk to you about a new ETF. I know that you have launched something called the TD Global Health Care Leaders Index. Maybe just tell us a bit about what it is and what's in it.
- Yeah, so back in 2019, TD launched a TD Global Technology leaders index ETF. It was a unique structure to capture growth in the technology sector. Similarly, when it came to designing our health care ETF, we wanted to address many of the pain points that the other ETFs out there currently aren't addressing.
So all in, the TD Global Health Care Leaders Index ETF is unique for a couple reasons. First, the ETF provides investors with a diversified one-stop solution for access across global health care, so not just the US, and across a broad range of innovative companies.
Second, ETF has a unique cast methodology, with the weight of mega-cap companies capped at 2%. This reduces the weight allocated to slower-growing mega-cap pharma companies. Instead, the ETF tilts a weight towards higher-growing areas, such as biotech, medical devices, life science tools and health care services.
And last but not least, ETF is cost efficient, with a management fee of 0.35%, which is the lowest for any health care ETF in Canada.
- Hmm. I know that you've got some interesting names and also some interesting, I think buckets, that you talk about, in terms of how you look at some of these companies. What are those?
- Yeah, while there are thousands of publicly-traded health care companies globally, at the end of the day, they all fall under one of three buckets. So I call these the three D's. The companies are discovering drugs, the companies that are developing widgets, and the companies are delivering services.
The first bucket are the companies that are discovering drugs. This includes your pharma and biotech companies, ranging from big players like Pfizer, to up-and-comers like Moderna. For the mega cap companies here, it's a tough business, given their quasi running on this treadmill of patent expiries. But we've designed each have to more of the mid and large caps. As well as more biotech, where the growth is stronger.
The second bucket are companies are developing widgets. So these are the medical device companies, the ones that make pacemaker, heart valves, surgical robots. In addition to lifelines tools companies that make the DNA sequencers, the equipment needed to make vaccines, and the COVID-19 tests as well.
The reason we like these companies a lot is because they benefit from the same sector, tailwinds of innovation, but without drug discovery or patent risks you get in pharma and biotech. So we find a lot of high-quality companies here. So companies like Thermo Fisher Scientific, on the lifelines tool side and Avid Lab, on the medical device side as well.
Then the large bucket of companies are the ones that are delivering services. So this includes health insurers, clinics, telemedicine companies. UnitedHealth Group is an example, a very high-quality name in this space. And the nice thing about this group is that they benefit from the growth in health care services more broadly, but without taking on any research and development risk.
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I want to start if we could, and just to pull back and get a really big picture, you've noted in a recent report that two of your key drivers of growth in the health care sector are demographics and innovation. I guess we're just all getting older, aren't we?
- Yeah. So when you take a step back and look at the big picture, it's really been two very, very simple things that have driven the strong growth of health care. Yeah, the first is a growing and aging global population. As you can see in this chart, the world is getting grayer, with the global population of adults over 65 years of age having grown at 2.7% annual rate over the last 20 years. As we all get older, we all consume more health care services.
The second driver of growth has been innovation. It's arguably even more important. The reason innovation has been so powerful in health care, just like it has been in the technology sector, is because it opens up new markets where there are unmet consumer needs. For example, in the world of technology, e-commerce and smartphones barely existed 20 years ago, but have since grown significantly, given they fill large consumer needs.
Similarly, in the world of health care, innovations such as robotic surgery, DNA sequencing, transcatheter heart valves, and many new cancer drugs, didn't or barely existed 20 years ago. And with health care companies continuing to spend more on research and development each and every year, the pipeline for those innovations continues to reign really strong and will remain strong for years to come.
We've got a chart here that we wanted to show from one of your reports. But when you talk about innovation, you name some examples. But we see some things up here, genomics, diagnostics and therapies, small-molecule therapies, virtual care. There's just, there is so much.
It's amazing actually, too, because when you think about it, a lot of this has not yet been-- technology's really not hit a lot of parts of health care yet.
Yeah. When we look forward to the next 10 years, yeah, there's really six big themes when it comes to health care innovation. As you mentioned, the first two relate to genomics. As I'm sure everyone remembers from high school biology class, genomics is just simply a fancy term that refers to all our DNA.
Allowing this innovation to accelerate in recent years has been a collapse in the cost. This is allowing innovation such as genomic-based diagnostic, including a big focus on early cancer screening and genomic-based therapies. mRNA vaccines, for instance, are a very good example of that over the past year. Moving along to that third bucket of innovation, it's further advancement in small molecule and antibody-based drugs, with companies really focusing their efforts on cancer, obesity, and mental health.
The fourth bucket I'd call out is virtual care. So this has grown a lot under COVID. But it will continue to grow quite a bit, in the years ahead. The fifth bucket are intelligent medical devices. So this includes everything from robotic-assisted surgery, which is still in the early days. And on the consumer side, also includes things like continuous glucose monitoring, which can monitor your blood sugar 24 hour a day and with those with diabetes, can send alerts directly to your smartphone.
Last but not least, this is an earlier area, but computer-aided drug discovery is an area that can help us discover more drugs more quickly and at lower costs. So it's another area to watch out over the upcoming decades.
- Hmm. So much happening. I'm going to bring up, again, a piece that we brought in from your report that shows just how well the sector has performed. We can see that this is a look at health care S&P 500 health care versus the S&P 500. Some really big numbers there.
But I'm actually going to move on, if I could. I wanted to talk to you about a new ETF. I know that you have launched something called the TD Global Health Care Leaders Index. Maybe just tell us a bit about what it is and what's in it.
- Yeah, so back in 2019, TD launched a TD Global Technology leaders index ETF. It was a unique structure to capture growth in the technology sector. Similarly, when it came to designing our health care ETF, we wanted to address many of the pain points that the other ETFs out there currently aren't addressing.
So all in, the TD Global Health Care Leaders Index ETF is unique for a couple reasons. First, the ETF provides investors with a diversified one-stop solution for access across global health care, so not just the US, and across a broad range of innovative companies.
Second, ETF has a unique cast methodology, with the weight of mega-cap companies capped at 2%. This reduces the weight allocated to slower-growing mega-cap pharma companies. Instead, the ETF tilts a weight towards higher-growing areas, such as biotech, medical devices, life science tools and health care services.
And last but not least, ETF is cost efficient, with a management fee of 0.35%, which is the lowest for any health care ETF in Canada.
- Hmm. I know that you've got some interesting names and also some interesting, I think buckets, that you talk about, in terms of how you look at some of these companies. What are those?
- Yeah, while there are thousands of publicly-traded health care companies globally, at the end of the day, they all fall under one of three buckets. So I call these the three D's. The companies are discovering drugs, the companies that are developing widgets, and the companies are delivering services.
The first bucket are the companies that are discovering drugs. This includes your pharma and biotech companies, ranging from big players like Pfizer, to up-and-comers like Moderna. For the mega cap companies here, it's a tough business, given their quasi running on this treadmill of patent expiries. But we've designed each have to more of the mid and large caps. As well as more biotech, where the growth is stronger.
The second bucket are companies are developing widgets. So these are the medical device companies, the ones that make pacemaker, heart valves, surgical robots. In addition to lifelines tools companies that make the DNA sequencers, the equipment needed to make vaccines, and the COVID-19 tests as well.
The reason we like these companies a lot is because they benefit from the same sector, tailwinds of innovation, but without drug discovery or patent risks you get in pharma and biotech. So we find a lot of high-quality companies here. So companies like Thermo Fisher Scientific, on the lifelines tool side and Avid Lab, on the medical device side as well.
Then the large bucket of companies are the ones that are delivering services. So this includes health insurers, clinics, telemedicine companies. UnitedHealth Group is an example, a very high-quality name in this space. And the nice thing about this group is that they benefit from the growth in health care services more broadly, but without taking on any research and development risk.
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