Join our community of smart investors

High-tech healthcare

Increased computing power is radically altering the delivery of healthcare – we diagnose the prospects for the best of British healthcare tech
June 26, 2015 and Harriet Russell

Modern medicine and technology are deeply intertwined. Much of the progress in diagnosing, treating and curing health problems has revolved around revolutionary machines or materials, from X-rays to cardiographs to prosthetics. The need for new solutions is only rising as populations grow and age, budgets are tightened and costs spiral. Those pressures are forcing healthcare providers to improve their speed and efficiency, often by investing in computers, electronics and software applications.

Meanwhile, the ubiquity of medical information on the internet, the myriad magazines and websites dishing out diet advice and the parade of hospital dramas on TV has led consumers to demand greater control of their health and wellbeing. Their desire has manifested into ‘the quantified self’, or the trend of measuring every aspect of daily life, from diet and exercise to productivity and quality of sleep. The movement’s disciples believe that optimising their bodies and minds will lead to longer, fuller lives. Technology companies have jumped at the chance to wrap their wearable devices around people’s wrists. Options include Nike’s Fuelband, the Apple Watch, Google’s Android Wear, Samsung’s Gear Fit, Jawbone, Fitbit and Fitbug.

Alongside its new watch, consumer electronics titan Apple (US:AAPL) unveiled HealthKit, which collates the data collected by the various health and fitness apps on people’s mobile devices. It also launched ResearchKit, a platform for researchers to create apps that can diagnose asthma, heart disease, diabetes, breast cancer and other health issues. One example is mPower, which measures the trembling of users’ hands and the tremors in their voices to track the development of Parkinson’s Disease. Researchers can also use Researchkit to identify suitable candidates for clinical trials.

Computing pioneer IBM (US:IBM) has also waded into the sector. It plans to use its artificial intelligence technology, Watson, to gather and analyse vast amounts of health data from patient records, wearable fitness trackers and smartphone apps. It can then offer tailored insights to hospitals, physicians, insurers and researchers. It has also teamed up with medical powerhouse Johnson & Johnson (US:JNJ) to help monitor patients’ recovery from operations.

Google (US:GOOG), meanwhile, is developing a contact lens for diabetics that can measure the glucose levels in their tears and alert them of any blood sugar spikes or slumps. The search and advertising behemoth is also working on a nanoparticle that can travel through a person’s bloodstream, attach to cancer cells or ‘red flag’ enzymes that signal an impending heart attack, and send a warning to a patient’s or physician’s smartphone.

 

The world's largest companies are branching out into healthcare products

 

These efforts from the world’s largest technology companies suggest that the intersection of health and technology could be a lucrative stop for investors. Indeed, the global healthcare IT sector is forecast to grow 40 per cent between 2012 and 2017, to nearly $57bn (£37bn). One of the prevailing trends in the UK, spearheaded by politicians, is the shift towards ‘connected healthcare’ – ensuring that all types of healthcare providers can communicate and securely share patient information.

Software companies are in prime position to realise that goal, and they’re already reaping the rewards. For example, private equity group Vista recently acquired leading connected-healthcare provider Advanced Computer Software, paying a chunky 23 per cent premium to the average three-month trading price of the group’s shares.

 

Best practice

Advocates believe ‘big data’ analysis of health data could one day underpin personalised, remotely-delivered healthcare. But installing software doesn’t automatically boost productivity. The transition from paper and pencil to computers and tablets often requires sweeping changes to the workforces and cultures of healthcare providers. Surveys have found widespread discontent with electronic health record systems, which can produce thousands of unnecessary alerts and false alarms and risk making patients feel like just another number.

That hasn’t been an issue for Aim-traded EMIS (EMIS). Over 10,000 GPs, pharmacies and other healthcare organisations use its software to electronically transfer patients’ prescriptions and medical records. The group commands a 53 per cent share of the UK’s primary care market, and controls nearly 36 per cent of the community pharmacy market. It recently implemented electronic patient records for Gibraltar’s entire healthcare economy. And its Patient.co.uk website, which provides free health and wellbeing information, has over 17m monthly visitors.

EMIS showcased the value of its software in Camden last year. It helped to roughly halve elderly patients’ emergency bed days and accidents and reduce first and follow-up appointments with outpatients by a third. The group’s dominance and new products drove full-year sales up 30 per cent, sending adjusted operating profit up a fifth to about £33m. And it has doubled down on growth by purchasing clinical and administrative messaging provider Indigo 4, and buying two diabetic eye-screening specialists.

Rival Servelec (SERV) provides patient management software, chiefly to community and mental health organisations. The group, which also makes emergency shut-off controls for the energy and broadcast industries, has been courting NHS trusts that are exiting the national procurement programme and looking for a software supplier. It has won 17 of the 29 contracts up for grabs in London, which swelled its backlog of healthcare orders by more than half to nearly £34m. It is now focused on a similar refresh in the north of England. And it has expanded into other segments of the healthcare market: it recently bought Corelogic and Aura, adding social care and bed management software to its product suite.

Another option is Ideagen (IDEA), which helps hospitals cut down on costly mistakes by digitising and managing their medical records. It recently inked a contract spanning eight UK research labs and won a £1m contract with an NHS Trust. Like EMIS and Servelec, it has broadened its offering through acquisitions. It snapped up EIBS, an intranet, portal and mobile specialist that counts 40 NHS trusts among its customers, and Gael, whose software is used by over 1,000 clients to manage governance, compliance and risk. Management expects those deals to help drive a 59 per cent rise in full-year sales to a little over £14m, sending adjusted cash profit up 42 per cent. And there’s still plenty of room for growth, as only about 30 per cent of the UK’s 192 NHS trusts have a completely electronic patient record system.

Investors looking to tap into America’s resurgent economy and enormous healthcare market should consider Craneware (CRW). More than a quarter of US hospitals use its software to accurately price and bill for patient treatments and supplies. The group has benefited from shrinking healthcare budgets and new, complex regulations, which are pressuring hospitals to cut costs and improve efficiency. The upshot was a 13 per cent rise in the total value of contracts it signed in the second half of 2014. Moreover, strong sales of new products and rising renewal rates meant Craneware’s visible revenue for the three years to the end of June 2017 rose 6 per cent to $120m. And that could prove conservative: Craneware recently won exclusive US distribution rights to a powerful data analysis platform that can help hospitals identify and focus their care on the patients most likely to be readmitted, reducing costs.

OMG (OMG) has ties to the US, too: Hollywood studios rely on its Vicon motion capture technology to bring characters such as The Avengers’ Hulk to life. But its cutting-edge cameras are also used to analyse the gait of children with cerebral palsy, monitor rehab patients and study animal behaviour. Its life sciences division counts Guy’s Hospital in London and Nuffield Orthopaedic Centre in Oxford among its customers, and both Shriners Group of Hospitals and The Oxford Gait Lab upgraded their cameras last year.

OMG has reshaped its business to boost profitability. It recently sold its defence imaging business, removing its reliance on lumpy, unpredictable military contracts. And it has slashed its costs by limiting its Life division – which previously made, marketed and sold Autographer wearable cameras – to developing and licensing out its technology.

Semiconductor companies are also connecting to growth opportunities in the healthcare IT space. Low-power wireless microchip specialist Toumaz (TMZ) created SensiumVitals, an electronic plaster that sticks to a patient’s chest and can detect early signs of a heart attack. Sixteen hospitals across seven countries have deployed it, including Queen Elizabeth Hospital Birmingham. The product’s success drove Toumaz’s healthcare sales up more than 10-fold to about £0.8m.

Similarly, Telit Communications (TCM) is one of the global leaders in machine-to-machine communication. Its technology has myriad applications, ranging from cars to mobile health devices. The group has a stellar track record: sales have risen by an average of 27 per cent in each of the past five years, and management expects them to climb a fifth this year.

Investors who prefer a dedicated healthcare group may see potential in Premaitha Health (NIPT). Its non-invasive prenatal test, IONA, uses genetic sequencing technology to estimate the risk of an unborn child having Down’s syndrome or other serious genetic diseases. It only requires a sample of maternal blood. After launching IONA earlier this year, Premaitha has already won contracts with St George’s University Hospitals in the UK and healthcare organisations in Switzerland and Poland.

 

Choosing health tech winners

Unrelenting pressure on healthcare providers to cut costs and increase efficiency, coupled with consumers’ growing desire to quantify their lives and take control of their health, has produced rich opportunities for all kinds of healthcare technology companies. Some of our readers may balk at investing in fledgling companies in a nascent, unpredictable industry. We agree that it’s still early days for wearable technology, health apps, healthcare software and many other market segments. But Apple and Google strike us as safe bets, and their shares offer substantial value. For those with a greater appetite for risk, we recommend buying Servelec, OMG, Toumaz and Telit. All four offer strong growth prospects and differentiated technology, and their shares trade at attractive forecast ratings for 2017.

 

 

Digital diagnosis

Digitising health is big business these days, and offers would-be biotech investors a de-risked model separate from more traditional drug development, albeit still at the forefront of the latest technology developments. This is particularly prevalent in the diagnostics market where better technology can deliver quick patient results at lower cost.

Akers Bioscience (AKR) makes single-use products that are designed to be used in vitro – outside of the body – to deliver accurate diagnostic results. Akers claims this could underpin a significant reduction on the cost of healthcare, particularly in the US, where healthcare reforms are amounting to soaring costs for the government.

The company’s BreathScan product is a breathalyser used to detect the amount of alcohol in a person’s system. It only requires four simple steps to use the device and takes just two minutes to generate results. While this is ultimately designed for officials to administer, the group also makes CHUBE, a version sold directly to consumers wishing to monitor their own alcohol levels. Akers claims this could significantly reduce the rate of alcohol-fuelled accidents.

Moving away from alcohol, but sticking with breathalysers, the group also makes Metron, a device designed to detect levels of ketones in breath condensate. This indicates whether an individual is burning fat as an energy source and to what extent diet and exercise are delivering efficient fat-burning results.

Akers makes several products designed to deliver rapid results for a number of issues: cholesterol levels, free radical damage, malaria and dengue fever are just a few. The breathalyser devices are designed from Akers’s patented biosensor technology, while some of the

more sophisticated devices use technology that filter micro-particles in response to antibody or antigen bindings.

Another company bridging this healthcare and technology space, as a means to reduce costs is Constellation Healthcare Technologies (CHT). As more countries introduce mandatory insurance reforms (the most pertinent examples being the US and Dubai), a rise in previously uninsured patients is putting downward pressure on multiple healthcare organisations. Rising costs are a problem for governments and medical groups alike, but this is where Constellation says it can help ease the burden.

The group offers what it calls “comprehensive” technology solutions, which include billing, practice management and electronic health record systems. This offers medical groups the opportunity to streamline their organisations, reduce costs and drive maximum revenues. Constellation’s target market is US physicians (GPs in the UK), where the billing market alone is said to be worth in excess of $37bn (£23bn). Most of that market is outsourced at the moment, but Constellation says that only represents a chance for the company to offer in-house solutions at a lower cost.

Constellation – which joined the London market in December 2014 – just announced a slew of new contract wins. Across four new clients, the group will collect $136m in billings annually and bill on behalf of nearly 400 new doctors. The contracts come into force between May and June this year, and should result in roughly $6-$7m in annual revenue and approximately $2m-$3m in annual cash profit. They should run for three years, and chief executive Paul Parmar called it an “excellent start to 2015”. The new contracts came hot on the heels of a $20m acquisition of New York-based competitor PPP in March.

Another example is Netscientific (NSCI) – a portfolio of companies offering various services to the healthcare industry. Wanda inc, a subsidiary of Netscientific, offers in-house, ‘virtual’ patient care systems. This means monitoring devices used at home by patients with chronic illnesses such as diabetes, hypertension and obesity can be read remotely. The benefit is that care providers could analyse the data in real time and pre-empt patient events, even before symptoms start to occur.

Qlida, another Netscientific subsidiary, is developing handheld diagnostic tests for conditions that could be life threatening, including cancer and cardiovascular disease. The technology – which is designed to detect toponin, an early indicator of heart attacks – is even smartphone enabled. Similar to tests being developed at Akers, Qlida’s tests are designed to be used by any doctor in an emergency room, without having to wait for traditional laboratory tests. The smartphone angle means these tests should be popular in developing countries, where such devices are increasingly ubiquitous and existing medical infrastructure poor.

Also finding its way into the smartphone and app market is Aim-traded Deltex Medical (DEMG). Traditionally, Deltex has developed Oesophageal Doppler Monitoring systems which measure blood flow in the central circulation system in real time. By monitoring fluids in this manner during surgery and after, it means any risk of complications post-surgery are dramatically reduced. To use these systems, Deltex has to place trainers into hospitals across its main market – the US. But already glimpses of the future are becoming clear: the group has a fully-instructional app available that is designed to guide people how to use the machines. Aim minnow Cloudtag (CTAG) – officially classed as a medtech company in London – has taken this to the next level and picks up nicely on biotech’s theme of personalised medicine. In fact, through its training companion app, the company claims to tie the gaming, health, software and fitness worlds together.

This is arguably the next frontier for healthcare, rather than traditional biotechnology. The rise of technology gives way to increased personal monitoring of health, fitness and illness. The emergence of WebMD and NHS online has meant more patients consider diagnosing themselves at home before they will see a professional. It only makes sense that as biotechnology companies continue to grow, and treatments become more sophisticated, so too will digital companies offering patients the chance to monitor their own health.

This disruptive trend has largely been referred to as ‘mHealth’ – mobile health – which commentators say is a means of keeping people out of the casualty department. Mobile technology can be used to monitor and report data on indicators such as blood pressure, oxygen, and cholesterol levels. Data is then fed into tracking software so doctors can detect problems when they start, leading to earlier intervention. Smartphones can then relay advice back to patients, which should help promote healthy behaviour. In January last year it was estimated there were more than 100,000 apps already available for people to improve their health – or at least their awareness of it.

Harriet Russell

 

Biotech’s high-tech future

A January report by the BBC claimed the UK is now the “top destination for fundraising by life sciences companies”, ahead of Switzerland, France and Germany. It’s unclear whether this included biotech’s golden market – the US – but the BBC quoted a report for the BioIndustry Association showing there were 460 biotech drugs under development in the UK, a 15 per cent improvement year on year. It’s important not to ignore the US, however. It’s the most important healthcare market. It spends more on healthcare than any other country (on a per-capita basis) and has long been considered the global leader in innovation.

Speaking of innovation, the biotechnology sector is a controversial topic for investors – especially in London. In New York, the sector has fared well despite multiple high-profile drug failures in the early 2000s. In January, market watchers noted a volatile US market was ushering investors back into life sciences. That month the Nasdaq biotechnology index was up another 5.7 per cent, having risen 100 per cent in the two preceding years. A temporary sell-off in December 2014 hardly seemed to matter. Instead January’s gains added $40bn to the index’s market capitalisation, which more than confirmed its ability to continue outperforming the broad S&P 500.

Clearly, Wall Street still has faith in the biotech boom. The rumours of a bubble hardly seem well-founded after four years of double-digit gains for the sector and five years when it has finished ahead of the benchmark S&P 500. Admittedly, the risks are still high: the index trades on a PE ratio of 42.7 times for 2015, below the 72.6 level recorded in 2012, but far above that of the S&P 500, data from Bloomberg shows.

That said, the sector has been buoyed by intense M&A speculation – not just in its own sphere but also between its big pharma cousins. Now that large pharmaceutical companies are confronted with the loss of exclusivity on many of their drugs and uninspiring future product pipelines, they’ve been busy buying biotechs at hefty premiums. A report by the Financial Times remarked that this was arguably how ‘speciality pharma’ businesses were being built today. Early-stage companies across the pond are also raising funds with relative ease, first from venture capitalists and then from institutions and public markets. Last year Credit Suisse estimated there were 82 initial public offerings of biotech companies, beating the previous record of 67 set in 2000.

Arguably, there’s still a lot to lose if any of these new drugs and technologies fail. Tremors were felt when US biotech giant Gilead (US: GILD)– the maker of a $1,000-a-day hepatitis-C pill – prompted a sell-off across the sector when it warned its treatments should not be used in combination with a particular type of heart drug. Some patients had reported abnormally slow heartbeats before one died of cardiac arrest. But the bulls argue that significant leaps forward in science – both in genetics and technology – leave the risks looking altogether less threatening than 15 years ago.

 

Biotech hazard: sentiment can turn against drugs firms if new treatments fail

 

The main themes are arguably immunotherapy and ‘personalised medicine’. The next breakthrough drug would hopefully play on both these elements. The former is based on genomic science which knowledge of, some analysts say, has come on in leaps and bounds since the start of the century. It means the latest cancer drugs can use a patients’ own immune system to fight tumours by better detecting the location of cancer cells and destroying them with minimal impact on normal cells. This is commonly referred to as ‘immuno-oncology’, which City analysts have said could be worth $40bn within the next 10 years.

But with this comes the need for more sophisticated technology, which is why big pharma is scoping out the latest biotechnology companies for innovation. Big pharma believes in combining existing cancer treatments – sometimes referred to as ‘mono-therapies’ – with newer more-effective ‘immunotherapies’ to successfully treat cancer and score huge profits in the process.

While immunotherapy and ‘personal medicine’ are today’s main themes in the biotechnology sector, one company wants to distance itself from this increasingly saturated market, and offers investors an interesting play on an exciting technology coming out of the healthcare market – nanotechnology. Midatech Pharma (MTPH) peddles itself as a ‘nanomedicine’ company. Specifically, it’s developed two platform technologies enabling the ‘targeted delivery’ and ‘controlled release’ of existing drugs. Essentially, drugs go to the “right place at the right time”, according to chief executive Jim Philips. Midatech isn’t necessarily in the business of personal medicine. Instead, treatments under trial – incidentally for cancer and diabetes – look for ‘typical’ cells in all patients before attacking relevant cancer cells. Unlike existing drugs, the number of ‘normal cells’ spared in the process is reassuringly high.

Midatech’s primary technology platform is based on gold nanoparticles. The nanoparticles carry existing drugs into the human system and allow for more ‘targeted’ delivery. Their small size means the nanoparticles can cross membranes and move between and through other cells to reach diseased cells. They’re also easily excreted by the body and are inert, so shouldn’t trigger any immune response. Several therapeutics and targeting agents can also be attached to a single nanoparticle.

The second platform is a ‘sustained release technology platform’, which enables drugs to be manufactured with ‘precision’ and released into the body in ‘a highly controlled manner’ over a specific period of time. This can be a few days or up to up to six months depending on the patients’ needs. Side effects are reduced, and curing, or at least controlling, the condition can be achieved using the smallest quantity of drug possible by the most suitable route available.

Investing in cutting-edge healthcare technology plays isn’t always easy. Many haven’t approached public markets given the sector’s strong tradition for venture capitalist funding. It’s also difficult for investors not involved in the industry to understand what drug technologies might mean for patients or what value the potential drug might be worth relative to the number of years it could take to develop it. HR