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Healthcare Innovation Investing Comes Of Age

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Across sectors, innovation comes in a variety of forms, but investors often conflate the technology sector with having a monopoly on innovation. Healthcare can easily give tech a run for its innovative money and then some.

In fact, healthcare innovation is a credible investment theme and one that is rapidly becoming more critical of the broader healthcare investment thesis. At the industry level, biotechnology companies and medical device and equipment manufacturers are among the more innovative names in the healthcare space. That thesis is confirmed by total returns.

For the five years ending Aug. 31, 2018, the S&P 500 Health Care Index outperformed the S&P 500 by 730 basis points. During that period, the S&P 500 was up 95.90 percent. Over the same period, the Dow Jones U.S. Select Medical Equipment Index and the Nasdaq Biotechnology Index were up 183 percent and 157.80 percent, respectively.

Old school, blue-chip pharmaceuticals companies are recognizing the healthcare innovation opportunity. As just one example, Merck & Co., Inc. (MRK) has a global health innovation fund, a $500 evergreen fund with over 40 digital health investments.1

Defining Healthcare Innovation

The bulk of healthcare innovation centers around therapies, drugs, or medical devices, extending to products such as breakthrough drugs and surgical robots. Company-specific includes ABIOMED, Inc. (ABMD), a medical device maker that has seen its shares more than double this year (as of Sept. 10, 2018); and Intuitive Surgical, Inc. (ISRG), the company behind the well-known da Vinci surgical system that makes it easier for surgeons to perform various procedures in less invasive fashion.

On the surface, it may appear that healthcare innovation begins and ends with developing new drugs or devices. In reality, the healthcare innovation theme is far more expansive than that and is intimately linked to several other disruptive, investable themes, including artificial intelligence (AI), big data and cybersecurity, among others.

“While AI has been used in medical technology for decades, the availability of vast amounts data, lower computing costs and more sophisticated algorithms mean revenues from AI tools are expected to soar to $6.7 billion by 2021 from $811 million in 2015,” Reuters reports, citing research firm Frost & Sullivan.2

As the chart below indicates, professionals in the field believe innovation is needed across a slew of healthcare arenas, including some that underscore the links between various disruptive investment themes.

Source: Technology Innovation in Healthcare Survey, HIMSS Media, August 2018

Another example of other themes linking up with healthcare innovation is the data demand created by AI’s emerging importance in the healthcare industry. AI offers healthcare institutions and professionals the ability to accurately and efficiently process patient records, among other functions. While increased accuracy and efficiency is desirable, it also creates massive data demands.

Related: A Sector Where Smaller Works

“Artificial intelligence in healthcare requires a continual input of fresh data,” according to Medical Design & Outsourcing. “Without new data, the models may change in an unpredictable way. New data are also needed since trends may change over time which needs to be accounted for by models. It is therefore crucial that we have new data for input for these AI models.”3

Where Themes Converge

The ALPS Disruptive Technologies ETF (DTEC) eliminates the need for advisors and investors to buy a traditional healthcare fund and pair that fund with other instruments as a means of building healthcare innovation exposure. DTEC equally weights 10 disruptive investment themes, including healthcare innovation and several of the other opportunities highlighted here. Overall, AI, big data, cybersecurity and health and healthcare innovation are four of the 10 themes represented in DTEC.

1 Source: Merck Global Health Innovation Fund http://merckghifund.com/
2 Source: Reuters Aug. 31, 2018 https://www.reuters.com/article/us-healthcare-medical-technology-ai-insi/medtech-firms-get-personal-with-digital-twins-idUSKCN1LG0S0
3 Source: Medical Design & Outsourcing Sept. 11, 2018
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Disruptive Technology Theme Risk. Companies that the Index Provider believes are developing disruptive technologies may not in fact do so or may not be able to capitalize on those technologies. Companies that develop disruptive technologies may face political, legal or regulatory challenges. Such companies may also be exposed to risks applicable to industries or sectors other than the disruptive technology Theme for which they are chosen and may underperform relative to other companies that are also focused on a particular Theme.
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Indxx Disruptive Technologies Index (IDTEC): based around companies that enter traditional markets with new digital forms of production and distribution, are likely to disrupt an existing market and value network, displace established market leading firms, products and alliances and increasingly gain market share.
S&P 500 Health Care Index – The S&P 500® Health Care Index comprises those companies included in the S&P 500 that are classified as members of the GICS® health care sector.
Dow Jones U.S. Select Medical Equipment Index – This index tracks the performance of companies in the medical equipment subsector. These companies are manufacturers and distributors of medical devices such as MRI scanners, prosthetics, pacemakers, X-ray machines, and other nondisposable medical devices.
Nasdaq Biotechnology Index – The NASDAQ Biotechnology Index contains securities of NASDAQ-listed companies classified according to the Industry Classification Benchmark as either Biotechnology or Pharmaceuticals which also meet other eligibility criteria. The NASDAQ Biotechnology Index is calculated under a modified capitalization-weighted methodology.
Big Data – term used to refer to the study and applications of data sets that are so big and complex that traditional data-processing application software are inadequate to deal with them.
Artificial intelligence (AI) is the intelligence exhibited by machines or software. One of the central problems (or goals) of AI research include natural language processing (communication).
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Thematic Investing: Designed to participate in longer term technological disrupters, economic and political developments and social trends.
ALPS Portfolio Solutions Distributor, Inc. is the distributor for the ALPS Disruptive Technologies ETF.
DTG000184 12/31/2018
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