Longer Term Investments

Longer Term Investments
HealthTech
Chief Investment Office WM | 28 June 2018 3:18 pm BST
Lachlan Towart, Analyst, lachlan.towart@ubs.com; Sundeep Gantori, CFA, CAIA, Analyst, sundeep.gantori@ubs.com
• The HealthTech theme identifies a number of related

technologies and markets linked by the aim of making
healthcare more efficient. At its core are developments in
data analysis and connectivity.
• An aging population is putting more and more pressure on
healthcare budgets around the world, spurring healthcare
providers to explore adopting new technologies that could
improve outcomes while saving costs.
• We estimate current markets linked to the theme to be worth
over USD 100bn. The potential addressable market for newer
technology applications is large but uncertain.
Source: Getty Images
• We recommend a diversified portfolio approach to investing
in HealthTech. Long-term investors could consider direct
investments through private equity to capture an illiquidity
premium.
Our view
Healthcare generates 5% of all the data in the world, according
to our estimates, yet it is one of the least digitized industries.
However, we now see signs that technology is slowly but surely
making inroads into healthcare provision, as the rising pressure on
healthcare budgets coincides with increases in processing power,
ever-greater connectivity and changing social attitudes.
Reimbursement trends also support the adoption of HealthTech.
Developed market healthcare systems are evolving to better align
the interests of payers and providers. The resulting "value-based"
reimbursement models place increasing demands on health data
systems, while patients are not only becoming more price-sensitive,
they also want to take greater charge of their own health.
Meanwhile, in emerging markets, remote technology offers the
chance to broaden the reach of health coverage.
We estimate current markets linked to the HealthTech theme
exceed USD 100bn. Newer opportunities including population
health and telemedicine have potentially large, but still uncertain,
total addressable markets. Their successful adoption could drive the
theme's overall growth to high single-digits or above over the next
decade.
Given the evolving nature of the technology and markets, we
recommend a diversified portfolio instead of trying to pick winners
at this stage. Long-term investors willing to accept illiquidity may
find attractive opportunities to gain direct exposure through private
equity investments.
This report has been prepared by UBS Switzerland AG and UBS AG. Please see important disclaimers and disclosures at the end of the document.
Fig. 1: Healthcare is one of the least digitized

HealthTech: Making healthcare more efficient industries
Today, healthcare is one of the least digitized of the major global Level of ICT
industries (see Fig. 1). But we see growing signs that healthcare digitalisation Media
providers, insurers, and even drug companies now recognize the Finance & Insurance
potential for digital technology to improve efficiency and help check Healthcare Retail
the relentless growth of healthcare spending around the world. The Food & Beverages
Oil & Gas
Automotive / Discrete
HealthTech theme identifies technologies and market opportunities Mining & Metals
linked by the aim of making healthcare more efficient in two ways: Utilities
Agriculture Chemicals
Buildings
• Improve outcomes. Artificial intelligence (AI)-assisted diag- Marine Industrial end markets
Time
Rail & Road Logistics Other industries
nostics that consider all available evidence, predictive analytics
to detect hidden co-morbidities, and individualized drugs with Source: Based on ABB, slightly adjusted by UBS. As of May 2017. Note:
ICT = Information and Communications Technology
reduced side effects are all potential ways HealthTech can
provide personalized care and improve treatment outcomes.
• Improve efficiency. Reducing errors and unnecessary
treatment, emphasizing preventive care, and shifting treatment
to cheaper locations without impacting quality can all help
reduce the cost of healthcare. According to Cotiviti, USD 900bn
is spent on potentially unnecessary treatment every year in the
US alone.
HealthTech's key drivers are the need for greater efficiency in
healthcare delivery, the rapid growth of processing power that
enables big data analysis and artificial intelligence, and better con-
nectivity allowing care to move outside the hospital. As these
trends have coalesced, a number of software and consumer tech-
nology companies have begun to explore the healthcare market,
and venture capital has also seen the opportunity. The wide-
spread adoption of smartphones may also spur further techno-
logical changes in healthcare delivery. For further reading:
• "Longer Term Investments - Enabling tech-
At the core of HealthTech is the ability to store, retrieve and analyze nologies," 21 May 2018
the vast mountain of healthcare data, which we estimate will reach
• "The economics behind long-term
2.2 zettabytes by 2020. We also consider adjacent technologies
themes," 20 February 2018
involved in automating treatment and diagnosis. Examples include:
• "Corporate Health - UBS Wealth Man-
• Population health software that applies big data analytics to agement White Paper," 2 November 2017
proactively manage the health of a large group of patients at
• "Longer Term Investments - Generics, " 5
lower cost than current volume-driven approaches.
July 2017
• Telemedicine to lower the cost of care by shifting treatment
from expensive hospital locations to the home. The average
cost of a telehealth consultation in the US is USD 40, compared
to a USD 125 in-person consultation, according to Citi.
• Integrating real-world evidence into the drug development
process to improve clinical trial efficiency, reducing patient
numbers and boosting drug net present values (NPVs).
• AI-assisted diagnostic imaging to free up physicians' time
for more complex cases.
While some argue that the industry is at a tipping point, we caution
against seeing HealthTech as a panacea. The vision of a fully-inte-
grated, connected and data-centric healthcare system is appealing,
but there are many challenges to digitizing healthcare, including
technical, commercial, regulatory, and social. HealthTech as a theme
is loosely defined and likely to evolve over time.
In this report, we explore the drivers of greater digitization of
healthcare provision, highlight potential technology applications
and attempt to quantify the addressable market.
UBS CIO WM 28 June 2018 2

Key drivers of the HealthTech theme Fig. 2: Life expectancy rising worldwide
Life expectancy at birth, years
Here we set out the factors that support the adoption of HealthTech 90
and summarize its potential practical applications. We provide a
85
more detailed analysis of each of the key technologies and related
80
markets in the appendix.
75
The need for change: Aging is driving an unsustainable rise 70
in healthcare costs
65
Healthcare spending has long been seen to be on an unsus-
60
tainable path in many developed economies. Despite a growing 1980 1990 2000 2010 2020 2030 2040 2050
China Japan Latin America
awareness of the problem, there appears little respite in sight for
US Western Europe World
both developed and developing economies:
• Demand for healthcare shows no signs of slowing. Life Source: UN, UBS, as of July 2015
expectancy is rising in both developed and developing markets.
The over-65 population, which accounts for two thirds of
healthcare spending, will likely more than double by 2050
(see Fig. 2). Also, ongoing urbanization in the emerging world
increases the prevalence of "lifestyle diseases" like obesity and Fig. 3: Healthcare costs rising as a share of
diabetes. GDP around the world
• Healthcare expenses are rising relentlessly, driven by both National healthcare expenditure as a share of GDP
higher utilization and underlying cost inflation. OECD countries 18%
alone spent USD 6.5 trillion on healthcare in 2016 and expen- 16%
diture is also rising rapidly in the developing world (see Fig. 3). 14%
Costs are projected to keep rising: in the US, the Centers for 12%
Medicare and Medicaid Services (CMS) predicts that healthcare 10%
expenses will reach 20% of GDP by 2026 (see Fig. 4). 8%
These trends are having a number of important effects on health 6%

delivery and consumption. Payers are increasingly focused on pre- 4%
ventive care and population health: evidence is already building of 2%
a shift to new reimbursement systems that reward quality and value 0%
1995 1998 2001 2004 2007 2010 2013
of care instead of the amount of services delivered. Equally, patients
United States Switzerland
are becoming more like consumers, paying more out-of-pocket, but
France Germany
taking a greater interest in their health choices. We discuss the links Japan United Kingdom
between HealthTech and value-based care in more detail below. China Turkey
India
HealthTech can exploit the rapid growth of healthcare data
While technology is only slowly creeping into healthcare provision, Source: World Bank, as of September 2017
the industry is already overwhelmed with data. UBS estimates that
healthcare will account for 5% of all data generated globally,
or roughly 2.2 zettabytes, by 2020. To put this into perspective, Fig. 4: Healthcare costs are expected to keep
it is almost twice the total amount of data generated globally rising
across all industries in 2010, highlighting the exponential growth US healthcare expenditure as a share of GDP
in healthcare data alone. By 2030, based on our latest estimates, 20%
the healthcare industry should generate more than 23 zettabytes of
data, which is more than 10 times the size of data the industry is 19%
expected to generate in 2020, or roughly the total amount of data
generated globally across all industries in 2017. 18%
So far, the healthcare industry has been better at generating data

17%
than it has been at using it. But new developments in artificial intel-
ligence and data handling technologies, as well as improvements in
16%
connectivity, suggest the industry may finally be reaching a tipping
point. From a practical perspective, electronic health records are
15%
now widely adopted in many Western markets and regulators are 2010 2012 2014 2016 2018 2020 2022 2024 2026
focused on driving standardization across healthcare IT systems.
Meanwhile, a raft of start-ups and established software companies US healthcare spend as a percent of GDP Projected
are exploring how to integrate artificial intelligence, big data and
Source: CMS, as of June 2018
even blockchain into healthcare systems, with the aim of making
better use of the vast mountain of data produced daily by healthcare

systems. On an individual level, this could improve diagnosis. On
a population level, opportunities include the reduction of total
treatment costs for healthcare systems, faster and more efficient
drug discovery and, potentially, predicting pandemic emergence.
The location of care is also changing, with smartphone-enabled
telemedicine allowing patients to access care whenever and
wherever it suits them, while saving costs for health insurers at
the same time. Adoption is still in its early stages: while many con-
sumers, especially millennials, turn to the internet for basic health
advice (the so-called "Dr Google") and finding physicians, the pen-
etration of telemedicine and wearable devices is still low (less than
10% and 20%, respectively, according to Rock Health). Telemed-
icine in particular could improve access to care in the emerging
world.
Technology companies and VCs have seen the opportunity Case Study 1: Amazon using technology to
Healthcare is a complex and heavily regulated industry. Important disrupt US healthcare services
regulations often differ at national and even regional levels and are Amazon provides one of the most visible examples of
technology companies trying to enter the healthcare
subject to frequent change. For this reason, the core healthcare IT market. In January 2018, Amazon announced a JV
market has historically been relatively unattractive to large enter- with JP Morgan and Berkshire Hathaway aiming to
prise IT companies that seek scalable products with a global use technology solutions to improve patient
market opportunity. But this may be changing: as the demands satisfaction and reduce healthcare costs. Though few
on healthcare IT systems change, and regulators demand new details are available so far of the new company or its
technology, early comments suggest it will employ
standards to ensure interoperability, the analysis of data, rather
big data, "virtual technology" and telemedicine,
than just its collection and processing, becomes more valuable. while attempting to offer patients choice and
Already, software companies are investing in multiple health-related engagement through wellness and lifestyle programs.
projects, while consumer-focused technology companies look to
partner with established healthcare companies. Wearable devices in We expect the JV to initially focus on reducing costs
particular could offer a route into the industry for companies with for its owners' employees, and if successful it could
look to make a similar approach available to other US
respected consumer brands (see Case Study 1).
patients. We think this JV bears watching as a high-
Startups are also developing a number of new products at the inter- profile exponent of many of the technologies covered
section of health and technology, with a wave of venture capital by the HealthTech theme. But we expect relatively
slow progress with the JV being built out at a
investment into the space in recent years. Since 2010, an estimated measured pace. Before the announcement, media
USD 30bn of venture capital (VC) funding was invested in the sector; reports said Amazon was interested in developing
2017 was the most active year on record, with USD 7bn invested, health technologies, including telemedicine and
according to data from CB Insights. electronic medical records.
Changing social perspectives

Changing social preferences are also relevant to the adoption of
HealthTech, in our view. The ubiquity of smartphones and younger
consumers' (particularly millennials) comfort with remote interac-
tions have changed attitudes to sharing personal data and infor-
mation. Privacy justifiably remains a concern, however. While millen-
nials are still too young to be the main users of healthcare, we think
that attitudes have shifted as a result of technological changes. We
also find evidence that attitudes vary from nation to nation, with
much less concern about data sharing in some Asian countries, such
as China, as compared to the US and Europe.
Several challenges may limit the pace of change
Given all these positives, the world of healthcare may seem to be on
the brink of a data-driven revolution. However, we note a number
of challenges that will need to be addressed before there is a
wider adoption of HealthTech technologies. Healthcare is, for good
reason, a heavily-regulated industry, and regulatory change tends to
come slowly. Regulations differ around the world, and even some-
times between states of the same country. Ethical standards can

also vary from place to place, and a given use of patient data may
be acceptable in one culture but be a taboo in another. Moreover,
healthcare provision is labor-intensive, and patients may not like
losing contact with their human doctors. And while healthcare costs
appear to be reaching a tipping point, they have been rising faster
than inflation for many years. In short, we do not expect software
to replace doctors in the foreseeable future. But we believe it is
prudent to position for change in the healthcare industry even
though that change may take some time to come.
Value-based care and HealthTech Fig. 5: Smartphone penetration is rising

We see the emerging growth of HealthTech applications as part Global smartphone penetration, %
of a broader set of trends, with both payers and patients affected
financially by the rising cost of healthcare provision. Healthcare 80%
payers (typically governments and insurers) are exploring new reim- 70%
bursement models that incentivize quality of care and greater value
60%
for money. Meanwhile, on the patient side, behavior is changing
and price elasticity is increasing as costs are shifted to the user. The 50%
former trend is likely positive for treatment outcomes, while the 40%
latter has the potential to be negative if not carefully managed. Both
30%
provide opportunity for companies in the HealthTech theme, in our
view. 20%
Value-based care: Measuring outcomes 10%

We believe many healthcare systems are at the early stages of a 0%
fundamental change in how healthcare is paid for. Reimbursement 2012 2013 2014 2015 2016 2017
models are evolving to align the interests of providers with both

Global smartphone penetration
payers and patients, by linking the price paid to the outcomes
achieved rather than the volume of service provided and encour- Source: UBS, as of March 2018
aging providers to share the financial risk that comes with managing
the health of a pool or population of patients. Such an approach
is generally referred to as "value-based care" or "value-based reim-
bursement".
Value-based care is not yet widely-adopted although many coun-
tries have begun to experiment with alternative payment models
that reward better quality of care through financial incentives. These
new reimbursement models include bundled payments, value-
based payments, shared-risk frameworks and capitated payments.
For example, in the US, trials were held for a number of alternative
payment models following the enactment of the Affordable Care
Act in 2010, and more recently US Health Secretary Alex Azar con-
firmed that a transformation to value-based reimbursement is one
of the current US Administration's top health priorities*.
While the transition to value-based reimbursement will undoubtedly
take time, we think the direction of the move is already clear and
we expect alternative reimbursement schemes to be a key element
of controlling the growth of healthcare costs in the future. Just
reducing waste creates a huge opportunity: according to healthcare
IT firm Cotiviti, USD 900bn is spent on wasteful or fraudulent claims
in the US healthcare system annually. Savings could also be made
by engaging patients and spreading clinical and operational best
practices.
* Source: Speech to the Foundation of American Hospitals, 5 March 2018

All of these tasks require greater use of technology and exploitation

of health data to quantify where and how healthcare dollars are
spent, and the outcomes associated with that spending. At a
minimum, providers will need to adapt their data systems to cope
with more complex reimbursement processes, but we also see a
need for better data analytics and software solutions for clinical
Fig. 6: Growth of high-deductible plans in the
decision guidance, work-flow management for complex clinical
US
cases, and co-ordination across multi-disciplinary teams. This puts Share of workers with high deductibles, and
HealthTech at the core of the transition to value-based care. average deductible (USD)
Healthcare "consumerization" supports the HealthTech 1,600 60%
theme
1,400
In the developed world, the rise in healthcare costs has forced health 50%
insurance policies to become less generous. This is most obviously 1,200
40%
seen with the rise of high-deductible health plans (HDHP's) in the 1,000
US (see Fig. 6). As patients pay out-of-pocket for more of their 800 30%
healthcare, they become more price sensitive: the price elasticity of
600
healthcare demand is increasing. This can have a negative impact on 20%
health outcomes. For instance, data from UBS Evidence Lab shows 400
that patients are more likely to skip prescriptions as their co-pays 200
10%
rise (see Fig. 7).

0 0%
But patients are also becoming more involved in their care, facili- 2009 2010 2011 2012 2013 2014 2015 2016 2017
tated by technology changes and the easier availability of health Average deductible (USD) USD 1,000 or more
data, such as via smartphone apps. We believe this is a desirable USD 2,000 or more
trend: the focus on outcomes puts more emphasis on prevention,
and more health-aware consumers should be less of a burden Source: Kaiser Employer Health Benefits Survey, as of September 2017.
Note: deductible for single coverage.
overall to health systems. We see these trends supporting various
aspects of the HealthTech theme, including wearable devices,
telemedicine and remote monitoring. Finally, many consumers are
also turning to "consumer genomics" companies to learn more
about their background and, increasingly, their own health. Fig. 7: Patients abandon prescriptions as
costs rise
Regional perspectives on technology impact in Rejected prescriptions, by size of co-pay
healthcare 3,000 90%
The impact of technological changes is likely to be felt differently in 80%
2,500
economies at different stages of development. Currently, we see at 70%
least three ways in which HealthTech can help shape the future of 2,000 60%
healthcare across different regions: 1,500
50%
40%
• In developed markets, particularly the US insurance-led 1,000 30%
system, digitization and automation can help reduce inef- 20%
500
ficiencies across existing healthcare systems, improving out- 10%
comes while lowering the total cost of care. 0 0%
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166-180
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196-210
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<1 or (blank)
• In emerging markets, particularly China, we see opportunity

to expand existing health services, bringing more patients
within the system, at a manageable cost. Telemedicine is a par-
ticularly important element of this opportunity. Reversed claims Completed claims
• Similarly, in frontier markets, such as many African nations, % reversed claims (RHS)
telemedicine could be a powerful tool in government and non-
government organization (NGO)-backed efforts to increase Source: UBS Evidence Lab, as of September 2017
access to care, perhaps using simpler more cost-effective tools

to enable treatment options where none exist today. This could
create impact investing opportunities in the future.

Investment conclusion
We believe the trends driving the HealthTech theme are likely to
persist, and even strengthen in the coming years. While some parts
of the theme are currently difficult for investors to access, these are
dynamics that any investor in the global healthcare sector should
be aware of, in our view.
We have attempted to quantify the market opportunities for the
various aspects of the HealthTech theme. Existing markets, primarily
in healthcare IT (EMRs and RCM software), R&D outsourcing and the
various diagnostic imaging and related hardware markets, total in
excess of USD 100bn according to our estimates. Growth here is in
the low-to- mid single-digit range. Newer opportunities, including
population health and telemedicine, have potentially large total
addressable markets, but are subject to much more uncertainty over
adoption rates and pricing. If successfully adopted, they could raise
the theme's overall growth to high single-digits or above over the
next decade.
Given this uncertainty, we see significant challenges to picking
winners in the HealthTech theme at this stage. Some of the iden-
tified technologies may represent a cost for health companies, with
the best investment opportunities coming from suppliers currently
not thought of as major players in healthcare markets. Competition
is likely to intensify, including companies from the technology and
consumer sectors. We therefore recommend a diversified approach
to investing in the theme. Our reference list of publicly-listed stocks
with material exposure to the various markets within the theme is
presented in the appendix. For long-term investors willing to accept
illiquidity, the HealthTech theme may offer attractive opportunities
to gain direct exposure via private equity investments.
Risks
Major risks to investing in the HealthTech theme include:
• Privacy and data security. Public scrutiny of how data is col-
lected and used is rising, and health data is particularly sensitive.
Many of the potential uses of digitalization in healthcare rely on
data sharing, such as the need to train machine learning algo-
rithms, and patients will need to be re-assured their data is pro-
tected. From a regulatory perspective, data-handling rules may
need to be updated to reflect technological developments. In
the US, health data is protected by the Health Insurance Porta-
bility and Accountability Act (HIPAA) of 1996 although its pro-
visions currently only apply to data generated in a healthcare
setting; there may be other personal data from which health-
related conclusions might be drawn in future. In Europe, the
recently-enacted General Data Protection Regulation (GDPR)
contains provisions to safeguard all personal data. Beyond con-
cerns about its legitimate use, theft of health data is also a
worry: according to The Economist, almost one quarter of data
breaches in the US happen in healthcare.
• Regulation and technology adoption. A number of bar-
riers exist to the wider adoption of value-based care, which
we see as a key application of healthcare digitalization. In
the US, legislation such as Medicaid best-price guarantees cur-
rently limits the ability of drug companies to negotiate out-
comes-based pricing contracts, while doctors face restrictions

on their ability to practice across state lines, which presents

a barrier to greater use of telemedicine. We think that, in
principle, value-based care enjoys bipartisan support in the US
Congress and expect regulations to gradually shift in its favor
although this could take some time. Similarly, adoption of tech-
nical standards allowing interoperability of health IT systems
may require legislation.
• Social and ethical issues. The delegation of partial or com-
plete diagnostic and treatment decisions from doctors to
software will likely face a number of social and ethical hurdles.
Patients may not be comfortable being "treated" by a com-
puter program, and doctors are unlikely to be keen to lose
their decision-making authority. Some software is opaque to
users, so the reason why a decision is made may not be clear,
which may un-nerve patients. Finally, legal liability could be a
concern: even where a program has been shown to be more
accurate than human physicians, it is unlikely to be 100%
reliable. The question of responsibility for misdiagnosis will have
to be settled, potentially by legislation.

Fig. 8: Overview of longer-term investment

Link to Sustainable Investing topic clusters
To identify whether a Longer Term Investment (LTI) theme qual-
ifies as a Sustainable Investment (SI) theme, we follow a two-step
process. The first works top-down. LTIs are assessed according to
whether they match one or more of the sustainability topics within
the environmental, social and governance (ESG) categories (see Fig.
8). In general, these themes must contribute to environmental sus-
tainability (e.g. a low-carbon economy), resource-efficiency (e.g.
energy, water), sustainable society (e.g. health, education, poverty
reduction, equality and social inclusion, etc.) or sustainable cor-
porate governance. The second, bottom-up step, consists of consid-
ering a thematically aligned representative universe of companies. A
large majority of included companies (80% or more) must align with
one or more of the ESG categories. For each individual company,
a minimum business involvement threshold is applied, e.g. 25% of
revenues must be derived from the thematic activity under consid-
eration.
We believe investing in HealthTech fits our sustainable investing * For simplicity, all topic clusters include several subcategories not
framework. The theme is aligned to Sustainable Development Goal included in the chart. For example: sustainable water includes water
utilities, treatment, desalination, infrastructure & technology, water effi-
(SDG) 3 (Good Health and Well-Being) due to its aim to improve ciency and ballast-water treatment. Within each subcategory are further
specifications; e.g. water treatment includes filtration, purification and
efficiency in the healthcare system, and to SDG 1 (Ending Poverty) waste treatment. In total, we have more than 100 categories (potential
SI investment themes) in our thematic database.
given the aim to provide access to basic services to all, particularly
in developing countries, by 2030. HealthTech is especially impactful
in developing countries where limited access to health services Source: UBS, as of June 2018
is a main cause of mortality and poverty persistence. Innovative

approaches that allow doctors to consult and diagnose remotely, Fig. 9: MSCI ESG research ratings of
carry out disease surveillance, and other e-health initiatives, can help HealthTech reference list
address target SDG 3.d on "strengthening the capacity of all coun- Rating distribution in %, 40 companies
tries, particularly developing ones, for early warning, risk reduction CCC AA
and management of national and global health risks". Digitalization B 3% 8%
of health services could also improve the monitoring of the indi- 10%
cators needed to track progress.
A
We investigated the SI profile of our reference list using MSCI ESG 18%
Research ratings that rank companies from AAA (best) to CCC
(worst). The assessment encompasses the three ESG pillars. Each
pillar has sub-categories: under the environment, there are climate
change, natural resources, pollution and waste, and environmental
opportunities; in the social sphere, human capital, product liability,
stakeholder opposition, and social opportunities; and for gover-
nance, corporate governance. The research also identifies 37 key BB
ESG issues. For example, under climate change, companies are 40%
assessed based on their carbon emissions, energy efficiency and BBB
23%
product carbon footprint.
The distribution of ESG ratings for our HealthTech theme is broadly Source: MSCI ESG Research, UBS, as of 21 June 2018. Note: AAA = best
possible ESG rating; CCC = worst
comparable to the overall MSCI ESG universe rating distribution (see
Fig. 9 and Fig. 10). No companies have achieved the best rating
(AAA) but the share of companies with any A rating (26% and 30%
for HealthTech and the universe, respectively) and any B rating (73%
and 66%) are similar. The HealthTech theme has slightly fewer com-
panies with the lower single B rating. Of note, 19 of 59 companies in
the HealthTech theme are not rated or covered by MSCI ESG ratings.
Overall, we think the result shows that the theme is suitable for
investors with an SI focus but that selectivity is required.
Rachel Whittaker, Sustainable Investing Strategist
Melissa Spinoso, Sustainable Investing Analyst

HealthTech and venture capital Fig. 10: MSCI ESG research corporate cov-
erage
Long-term investors willing to accept illiquidity may gain a more
Rating distribution in %, 5,915 companies
direct exposure to HealthTech opportunities through private equity
investments rather than in listed equities. CCC AAA
2% 3%
AA
Private equity investors and especially venture capital (VC) funds
B 10%
are the primary source of capital for digital health companies. 19%
Since 2010, an estimated USD 30bn of venture capital funding was
invested in the sector, according to data from CB Insights. 2017
was the most active year on record, with USD 7bn invested. Early
data for 2018 suggests that funding activity is still accelerating: A
HealthTech deal volumes for 1Q18 reached USD 2.8bn across 191 17%
deals according to Startup Health data, the strongest quarter on
record.
US-based startups represent 75% of total global deals. However,
deal flow into startups outside of the US is increasing, especially BB
in China, India and Israel. Funding remains largely focused on 23%
early- and mid-stage startups, which account for about two-thirds
of total funding activity. However, a noticeable uptick in Series C BBB
and D investments (founding rounds for later stage companies) in 24%
recent years suggests that the sector is maturing and companies are Source: MSCI ESG Research, UBS, as of 19 December 2017. Note: AAA
starting to seek later-stage financing. The top-funded subsectors = best possible ESG rating; CCC = worst
currently include patient consumer experience, personalized health

and big-data analytics.
VC investments can provide access to high-growth companies Fig. 11: Venture capital investment in
across all stages of their development, with the potential for high HealthTech companies
returns, in our view. But such investments naturally come with risks. Number of deals and funds invested (USD billions)
Besides the inherently higher failure rate of startup companies, VC
investments differ significantly from investing in listed shares. 1,400 9
8
VC is essentially an opaque and illiquid market, with different 1,200
7
market participants having access to different levels of information. 1,000
Funding usually consists of multiple rounds of private financing by 6
investors who purchase newly issued, unlisted securities. Each round 800 5
triggers a capital increase and raises the risk of ownership dilution. 600 4
Also, shareholder rights such as voting, veto, exit or liquidation 3
rights can differ greatly between founders and investors. Securing 400
2
access to the best fund managers to mitigate these risks is critical 200
1
to maximizing the chances of success.
0
Competition among VC managers to fund the best companies is 2000 2002 2004 2006 2008 2010 2012 2014 2016
also very high. Investors should seek partnership with managers
who are actively sourcing deals and taking a leading role in the com- No of deals Funds invested (USD bn)
panies in which they invest, as opposed to employing a follower
Source: Pitchbook, as of December 2017. Note: Includes deals defined
strategy and focusing solely on unicorns and bigger deals. as "HealthTech" and "Digital Health" sectors.
Manager selection matters, but so does portfolio construction.

Investing in just one VC fund has historically proved to be a rather
inefficient way to access the asset class. Investors should commit
to a long-term plan and build exposure across vintage years, geo-
graphies, managers, etc. Importantly, VC exposure should be con-
sidered within a global private market portfolio diversified across
various private equity and debt strategies, and sized according to
an investor's risk appetite and goals.
Karim Cherif, Hedge Funds and Private Markets Strategist

Appendix: Defining the evolving HealthTech

market
HealthTech is not just a vertical in the broader IT market. Just as
"fintech" describes a specific set of applications of technology to
solve specific problems in the financial sector, we use the term
"HealthTech" to refer to the evolving use of information technology
to address the general problem of efficiency and cost constraints
in healthcare provision. While the HealthTech theme has connec-
tions to other themes, including consumer technology (e.g. wear-
ables) and enabling technology (e.g. artificial intelligence and big
data analytics), we view these applications as a discrete set of over-
lapping opportunities.
We have divided the broader theme into four sub-segments to aid
analysis. We note that many of the technologies and applications
we describe are defined in various ways by different sources and
market players. As the market evolves, we expect the segments to
blur and overlap further, with the boundaries of the theme likely
to shift further over time as companies from other sectors seek to
enter healthcare markets. Similarly, where we have attempted to
estimate addressable market sizes, we highlight the relatively high
level of uncertainty, as technology, social and competitive trends will
all likely evolve over time.
Software, artificial intelligence and big data

The ability to store, retrieve and analyze health data electronically is
at the core of the HealthTech theme. Although electronic medical
records (EMRs) are already widely adopted in the US and many
European countries, better analysis of cost and claims data is needed
to support value-based reimbursement. The end goal for many
payers is to combine data from multiple sources with sophisticated
analytics to manage patients' health at the population level. New
sources of data such as wearables could provide an entry point
for consumer or technology companies with superior brand value,
perhaps in partnership with healthcare companies. Technologies
including artificial intelligence, big data analytics and connected
devices all hold promise, but have not yet definitively established
their "killer apps" to cement their place in the treatment con-
tinuum.
Hospital IT systems: From electronic medical records to pop-
ulation health
The core of the healthcare IT industry has historically been elec-
tronic medical records (EMRs), used to centrally store patients'
medical history and other health information. EMRs allow doctors
and other clinical staff to manage patient data more efficiently: at
their most basic, EMRs function as an electronic bedside chart, but
they also allow all of a patient's data to be stored centrally and
accessed from multiple points in the health system. They can be
created, edited and viewed by any authorized person across mul-
tiple healthcare providers.
In the US, the core EMR market is almost fully penetrated following
a period of government stimulus during 2011-15 that encouraged
a "meaningful use" of EMRs in hospitals.

The Health Information Technology for Economic & Clinical Health Fig. 12: HITECH Act funding
(HITECH) Act, passed in 2009, provided total funding of over USD Funds allocated to "meaningful use" provisions
35bn to fund EMR adoption in US hospitals and physician offices (USD bn)
(see Fig. 12), and by 2015 they were adopted in 96% of US acute 12
hospitals (see Fig. 13). Since 2017, penalties have been imposed for
10.1
failure to adopt EMRs. Outside the US, EMR adoption rates vary, but 10
9.7
a number of European healthcare systems have invested in digitizing

patient records although adoption is less broad than the US. 8 6.9
Revenue cycle management (RCM) software is used by hospital 6 5.3

management to track billings, services provided and costs incurred.
It simplifies the process of claim adjudication, payment accuracy and 4
HITECH act 3.2
Penalties for
revenue collection, processes that become more and more complex introduced non-
2 compliance
with greater adoption of value-based reimbursement. While in
the past many IT providers were focused on either EMR or RCM, 0
0.03
we expect vendors to consolidate and integrate their software 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
offerings, as providers prefer to minimize their number of suppliers,
given the increasing need for systems to be interoperable. HITECH Act funding
We estimate the size of the healthcare IT market size to be about

Source: BAML Research. As of February 2018
around USD 25bn, with most spending allocated to EMRs in the
US. Market growth in the US has slowed to mid-single-digits and
is driven primarily by replacement and upgrading of older systems, Fig. 13: EHR adoption now essentially uni-
although growth is also modestly geared to hospitals' capex cycles. versal in the US
The RCM market is less mature, and leading RCM vendors are still Hospitals with EHR systems in %
seeing growth in the mid-teens rates. Historically, major cycles in
hospital IT spending have been spurred by changing regulations, 100%
and we expect the next such cycle to be the adoption of new inter-
operability standards, either driven by regulatory standards or a 80%
commercial imperative. In Europe, several governments have intro-
duced EMRs in their national health systems but these large tenders 60%
tend to be lumpy. The core EMR market is fragmented although
two companies, Cerner and privately-held EPIC, dominate with a 40%
combined market share of around 50% (see Fig. 14).
With patient information now largely digitized, the industry has 20%
turned to the question of how best to capitalize on that data. The
resulting approach, often referred to as population health, builds 0%
2008 2009 2010 2011 2012 2013 2014 2015
on the concept of value-based care by integrating the services of
multiple providers (including hospitals, physicians, labs, etc) and
aligning their economic incentives to provide the best overall health All hospitals (basic EHR) All hospitals (certified EHR)
outcomes at a manageable level of total cost. IT solutions for pop- Source: Office of the National Co-ordinator of Healthcare Technology
ulation health will require systems that can integrate clinical and
financial data from disparate sources and systems and analyze it
systematically. Fig. 14: Market share of HCIT companies
Estimated share of US EMR market by hospital
Sizing the potential population health solution market is chal-
installations
lenging. While most healthcare IT companies already offer popu-
lation health solutions, absolute contributions to revenues are still Epic
25%
limited and the industry has had a number of "false starts" over
the years. Our current view is that population health solutions could
emerge as a meaningful driver of HCIT companies' revenues from
early in the next decade. The ultimate value of the market to IT
Others
providers will likely depend on what level of services and solutions 50%
the industry ultimately provides to hospitals and health plans. Esti-
mates of addressable market for population health and value-based
care solutions vary widely; we think a conservative assumption is
that a level similar to current EMR system sales can be reached
Cerner
within ten years, or around USD 25bn. 25%
Source: UBS estimates, as of June 2018

Beyond population health: next-generation healthcare IT and Fig. 15: Explosion of healthcare data
AI Volume of data in healthcare systems, in exabytes
As the amount of health data grows, analyzing it with traditional (log scale)
tools becomes more challenging. Not only is data exploding in 100,000
scale (see Fig. 15), much of it is unstructured, posing a challenge
to analysis. This suggests opportunities to use big data analytics,
artificial intelligence and machine learning to refine and interpret 10,000
the growing volume of health data. Indeed, a recent study by the

McKinsey Global Institute identified up to USD 300bn in potential 1,000
savings in the US alone by integrating machine learning tools into
population health forecasting, and a further 5-9% reduction in 100
healthcare costs from tailored treatments and patient engagement
(worth USD 150-270bn in the US at current spending rates).
10
We see a number of potential uses for AI and big data in healthcare
beyond tools for implementing population health:
• Clinical productivity enhancement. Machine learning could 1
2010 2020 2030
be used to improve clinical productivity by learning from users'
habits. For example, Allscripts' Avenel EMR platform is hosted Source: IDC, Bloomberg Intelligence, UBS estimates. As of June 2018.
Note: One exabyte is equal to one billion gigabytes (10^18 bytes).
in the cloud on Microsoft's Azure cloud platform and uses
machine learning to continuously improve physicians' work-
flow. Aggregate claims data can also be analyzed by pattern
recognition software to identify waste and inaccurate billing.
• Assisted clinical diagnosis using AI could increase diagnostic Case Study 2: IBM Watson applying AI to
accuracy by considering all available data, rather than just the cancer diagnosis
most recent test results in front of a physician. On one estimate, IBM's Watson Health is an AI-enabled diagnosis
platform with applications across drug discovery,
doctors only make use of one fifth of the available knowledge
treatment and care management. To date, IBM has
when treating cancer patients, due to the limits of their time invested over USD 4bn building its Watson Health
and memory. By comparison, IBM has developed its Watson business, mostly through acquisitions. However,
artificial intelligence software, famous for defeating leading financial results have been mixed so far.
human players in the TV quiz show Jeopardy, into an arti-
ficial-intelligence driven diagnostic tool that incorporates pub- Watson uses natural-language processing, deep
learning and evidence-based reasoning to piece
lished research and latest trial results to assist with cancer diag-
together connections between data and symptoms
nosis (see Case Study 2). that may not be spotted by even the most
• Drawing inference across specialisms. Much of a patient's experienced human physicians. As well as its millions
interaction with the health system is compartmentalised of pages of background knowledge, and a patient's
own data, Watson is able to incorporate family history
according to specialty, which can lead to important clues to a
and risk factors to create suggested diagnoses. Its
diagnosis being missed, but AI can identify patterns in data- output is a list of potential diagnoses, ranked by
sets that are too large or complex for analysis by humans. confidence, that can be used by physicians to assist
Wider availability of health data in electronic formats could their diagnosis.
allow software to find these linkages, potentially identifying as
yet undiagnosed co-morbidities. For example, combining EMR Watson's core technology is built on natural-language
processing, allowing it to "ingest" vast amounts of
data with genomic databases could help identify cancer risk in information fed to it in the form of clinical trial
patients being treated for other conditions. Software could also reports and hospital data, including unstructured data
be used to forecast health risks at the population level. like case notes. As of end-2016, Watson held over
300 million patient records in its health cloud.
The latter two use cases suggest the potential for fully-automated
diagnosis, potentially without the involvement of a physician. As a
simple example, Stanford University has developed software that
can diagnose skin cancer as accurately as a trained dermatologist,
simply by analyzing photographs. But we see challenges to the
adoption of such a system from both physician and patient accep-
tance, as well as regulatory and ethical issues. From a more technical
perspective, implementing AI-based solutions will require reliable
patient data. This could perhaps be helped by the integration of
real-world data collected by wearable devices.

Unlike health IT companies, consumer tech companies tend to have

brands that are known and trusted by patients, and can also inte-
grate health tracking apps into existing consumer-facing software
and devices. Despite all the potential benefits to patients, conve-
nience is likely to be a bigger factor supporting adoption.
So far, the use of blockchain technology in healthcare is limited,
but we see several use cases, including secure data storage and
forwarding across multiple networks, where various organizations Fig. 16: US seniors device ownership
have rights to access different parts of a patient's data. We explore Percentage of over-65s owning each device
this in more detail on page 20.
60%
Telemedicine and remote monitoring 50%

Very broadly, telemedicine can be defined as the use of telecommu-
nications technology to provide healthcare treatment at a distance. 40%
More specifically, this can include "live" interactions such as simple

30%
voice calls, but also exchange of data via store-and-forward plat-
forms ("asynchronous care"), remote monitoring and even medical 20%
education.
10%
Telemedicine offers a number of potential benefits to both payers
and patients, including: 0%
• Better match supply and demand. While the appeal of Smartphone Computer Tablet
telemedicine in today's busy world is clear, it is more important
Source: Pew Research Center, as of 2015
than just patient convenience. Better matching of resources to
needs can improve asset use for providers.
• Shifting care from expensive hospital locations to the
home or other cheaper locations, allowing providers to lower
the cost of care. Citi estimates that the average cost of a tele-
health consultation in the US is USD 40, compared to USD 125
for an in-person consultation.
• Provide care in remote or under-served areas, particularly
Fig 17: Over 150,000 health-related apps
in emerging markets where healthcare infrastructure is less
Number of apps for operating systems
established
The core premise of telemedicine is not new, but its adoption lagged
120,000
in the past due to patient dissatisfaction with "clunky" devices and
counter-intuitive user interfaces. We expect telemedicine to evolve 100,000
as technology improves: the advent of 5G networks will dramatically
increase connectivity speeds, making it easier and safer to transmit 80,000
critical health information wirelessly. Automating data collection via
the wider adoption of wearable devices with medical-grade sensors 60,000
is also likely to improve adoption by patients.

40,000
Beyond technological improvements, we think that social changes
will also make patients more amenable to remote treatment. Smart- 20,000
phone penetration is now around 70% globally and has changed
-
people's relationship with technology. Even among the elderly, who Apple App Store Google Play
make up the vast majority of healthcare users, computers and
smartphones are now widely-adopted (see Fig. 16), while younger
Source: Company data, UBS, as of April 2018
consumers are increasingly likely to use wearable devices with
smartphone apps to track their health. According to PWC, the
number of US consumers with at least one health app on their
smartphone doubled between 2013 and 2015 to over 30%. As
of 1Q18, there were almost 150,000 apps related to health and
fitness, with Apple's Appstore contributing 43% of those apps and
Google's Play Store most of the rest (see Fig. 17).

Apple's Health Records feature, for example, is available with iOS

11 and allows users to view, manage and share medical records
and combine hospital-sourced EMR data with data captured by the
user's own phone. There are more updates to the upcoming iOS 12 Fig. 18: US telemedicine total addressable
operating system, coupled with developments in the rival Android market could exceed USD 80bn
platform, resulting in increased usage of smartphones and con- Estimated US market opportunities, USD billions
nected devices for remote monitoring.
Post-acute Ambulatory
Given the relatively early stage of adoption of telemedicine in care care
developed markets, and evolving potential use cases, it is difficult to 1 15
size the addressable market at present. Many factors will determine
the size of the market beyond technology, including patients' accep- Inpatient
tance of remote treatment, reimbursement rates and regulatory 28
Behavioural
issues. Current US laws, for instance, generally prohibit doctors from health
12
practicing across state lines, creating barriers to the provision of
telemedicine services; but we believe these issues can eventually
be solved. According to Citi, the potential total addressable market
may be worth as much as USD 84bn in the US alone, encompassing Expert opinion
various services such as ambulatory care (doctor appointments), 28
behavioral health and expert opinion (see Fig. 18). The European Source: Citi research estimates, as of June 2018
market may offer a similar opportunity, with more patients but likely
lower value per appointment. However, at this stage, we see market
size estimates as quite speculative. Also, it is unclear how much of
this opportunity would accrue to the technology company.
Fig. 19: Market share of consumer wearable
Remote monitoring and wearables companies
"Wearables" allow people to regularly or constantly track health Market share in %, 2017
and other lifestyle data. Currently, they are mostly used for general
fitness tracking, but greater incorporation of medical grade sensors
Apple
could help support various remote monitoring and treatment ser-
15%
vices. Apple is researching non-invasive glucose monitors using
algorithms that can detect changes in the heart patter of diabetics
that can be synced to an iPhone or Apple Watch although as yet the
medical technology is not accurate enough for truly non-invasive Xiaomi
glucose monitoring. Accurate and unobtrusive remote collection of 14%
real-world health data could be useful in both clinical trials settings Other
and to inform treatment decisions. For example, the US National 53%
Library of Medicine initiated a clinical trial in July 2017 that will
likely last till December 2018 where physical activities of participants
and their family members are studied using a wearable device from Fitbit
Fitibit. The use cases should continue to grow in emerging markets, 13%
Garmin
thanks to the proliferation of low-cost wearable devices. 5%
Continuous collection of data about a person's vital signs can
serve as an early warning of potential exacerbations of a con- Source: Bloomberg Intelligence. As of June 2018
dition, as well as improving the quality of diagnostic data, as
it removes the influence of a patient's recent history on the
"snapshot" of data provided at a monthly checkup. For example,
the accelerometer in an iPhone can be used to monitor patients
for signs of Parkinson's disease tremors, while CityBlock Health, an
Alphabet-backed startup, uses smartphones to monitor vulnerable
patients remotely and sends health staff to their homes if necessary.
Telemedicine is particularly relevant to health systems in less
developed countries due to its ability to deliver care in remote areas.
For example, China lacks an adequate system of general practi-
tioners (GPs) for primary care, and suffers a geographical mismatch
between the demand for and supply of health provision (concen-
trated in rich coastal provinces).

While the Chinese government has succeeded in introducing near-

universal health insurance coverage, it has yet to successfully
counter the perception among patients that lower tier hospitals
and regional health clinics provide inferior care, which results in
most patients seeking treatment at large Tier III hospitals, even for
minor ailments. As a result, long queues, patient and doctor frus-
tration and even violence are common. It has been estimated that
the average outpatient hospital visit in China takes three hours, of
which less than ten minutes is actually spent with the doctor.
This environment provides a clear opportunity for telemedicine to
relieve the burden on hospitals, and at the same time make primary
care more accessible in remote areas. Ping An's Good Doctor app
uses AI-based algorithms to conduct an initial triage of patients
Fig. 20: Pharma industry productivity has
before handing them over to in-house physicians who can provide a
recovered
diagnosis, assisted by recommendations from the software. In turn,
Number of drugs approved by year since 1995
the doctors’ final recommendation (treatment or further referral) is
used to train the AI system. 60
50
Smart pills
Smart pills are medicines that can track whether they have been 40
taken as directed and relay this information back to physicians. 30
The first such pill to receive FDA approval was Otsuka Pharma's
20
Abilify MyCite, approved in November 2017 to treat schizophrenia.
MyCite combines a tablet with an ingestible sensor and an external 10
sensor that can detect when the pill reaches the patient's stomach
0
and relay that message to the patient's doctor via his smartphone.
2018 YTD
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Results have been mixed so far, however. Clinical data shows that in
some cases the drug is not detected in the stomach, and feedback
suggests that it is not popular with doctors or payers given perceived
privacy concerns. It is probably too soon to determine the ultimate NME/BLA approvals 5-year average
success of such smart pills. Source: FDA, UBS, as of June 2018
Applications of technology in drug development

The pharmaceutical industry is no stranger to data and innovation.
However, so far it has mostly employed technology as a means
to incrementally improve operating efficiencies, rather than using Fig. 21: Clinical success rates still low
digital technologies to drive wholesale change in the research Odds of clinical progression, by trial phase
process. But this may change in future, with many pharma com-
panies beginning to explore opportunities for digitalization as the 100%
85.3%
industry comes under more pressure to improve the efficiency of
drug discovery and development. While successful implementation 80%
of digital technologies may eventually become a success factor for 63.2%

58.1%
pharma companies, the investable revenue sources are most likely 60%
to emerge in the outsourced R&D provider market, in our view.

40%
The need for R&D efficiency 30.7%
While pharma R&D productivity has recovered from the lows in the 20%
mid-2000s (see Fig. 20), the financial cost of R&D is still enormous 9.6%
and only around 10% of drugs entering the clinic reach the market 0%
(see Fig. 21). A widely-cited 2014 study by the Tufts Center for the Phase I to Phase II to Phase III to NDA / BLA Phase I to
Phase II Phase III NDA / BLA to approval approval
Study of Drug Development estimated the average development
cost of an approved drug is USD 2.6bn, including capital costs.
Source: Biotechnology Industry Organization, as of 2016
Reducing cash costs and improving time-to-market are both key
drivers of increasing drug development NPVs.

We see scope for HealthTech to address several issues in the Fig. 22: Sequencing cost has plummeted
drug development process, including reducing data gathering costs, Cost of sequencing a human genome (USD per
improving analysis and streamlining the overall trial management genome, log scale)
process: 100,000,000
• Identification of patients and sites for clinical trials.
Finding patients for trials in a world where drugs target smaller 10,000,000
and smaller niche patient populations is difficult, time con-
suming and expensive. Speeding up the process can save time 1,000,000
and money. For example, Medidata uses cloud computing to
identify and stratify appropriate sites for clinical trials. 100,000
• Improving data capture from trial patients. Capturing data
10,000
in real-time and relaying it to physicians can provide not just
more data but better quality data, when compared to the
1,000
"snapshot" taken during a regular follow-up meeting at the
trial site. This could also help to reduce the number of patients 100
dropping out of trials due to the inconvenience of visiting clinics 2001 2004 2007 2010 2013 2016
(up to 30%, by some estimates).
Source: genome.gov, as of May 2018
• Integrating real-world evidence into the drug devel-
opment process. The FDA has expressed a desire to incor-
porate so-called "real world evidence" in the drug approval
process. Again, this could be collected using wearable devices Fig. 23: Digital technology penetration in
or even by creating virtual control arms based on analysis of clinical trials
existing medical databases, perhaps using AI-enabled software. Technologies included in clinical trials, survey
Some pharma companies are already exploring this angle: response in %
Roche recently acquired Flatiron Health, an EMR provider with 80%
a focus on oncology, in order to integrate its real-world patient 70%
data into drug development. Flatiron's platform captures both
60%
structured and unstructured data, combining sources such as
50%
clinical labs, payer data and EMRs to generate real-world evi-
dence of a drug's efficacy. Flatiron believes its approach can 40%
achieve many of the gains highlighted above, including opti- 30%

mizing trial eligibility assessment and generating better quality 20%
clinical trial results. 10%
Beyond improving trial efficiency, we see opportunities to enhance 0%

Wearable In-home Sensors Mobile apps
the scope of the drug development process by exploiting new data activity clinical-grade
sources. Enormous volumes of genomic data have been gathered trackers devices
in the last two decades as the price of genome sequencing has Have included in trials
fallen (see Fig. 22), making it almost routine today. This data can Would like to include in future trials
potentially be combined with real-world patient data in adaptive Source: Validic. Note: Question "what kinds of digital technologies have
trials, where the hypothesis to be tested can evolve as data come in, you included or would like to include in trials?", n = 166. As of 2016
without undermining the integrity of the trial. The venture capital-
funded company, BenevolentAI, for example, uses a machine-
learning algorithm that incorporates data from scientific research
papers, real-world patient data and other sources to help under-
stand disease processes and reduce the development time of its own
pipeline of drugs. We expect the use of HealthTech applications in
drug development in rise: according to a 2016 study by the digital
health platform company Validic, over 97% of researchers polled
expected to use digital technologies in clinical trials within five years,
with wearable activity trackers and sensors amongst the highest-
focus technologies (see Fig. 23).
Outsourced R&D
Contract research organizations (CROs) provide outsourced R&D
services to the pharma and biotech industry, including pre-clinical
and clinical trials, lab testing and data analysis. CROs have already

started to use big data analysis to speed up clinical trial processes,

including enrollment, as they attempt to differentiate themselves.
For example, LabCorp, a US clinical laboratory chain that owns the
Covance CRO, has over 70 million unique patient records within
its lab business that it is attempting to leverage in order source
patients for clinical trials. We estimate the global market for out-
sourced clinical research is worth about USD 35bn, and is growing
Fig. 24: Global imaging sales, by modality
in the high-single digits.
Share of each modality in total market (total USD
Imaging, image-guided therapy and robotic 32bn)
surgery Molecular
Imaging
The imaging market provides a practical example of how advanced 6% Ultrasound
software and artificial intelligence are already being used to create X-ray 31%
20%
efficiencies in healthcare delivery by combining image data with
software. Image-guided and robotic surgery techniques also have
the potential to cut healthcare costs by reducing surgical complica-
tions and shortening hospital stays.
Diagnostic Imaging already incorporates AI
Imaging provides clinicians with visual impressions of a patient's CT
20%
interior as an aid to both diagnosis and treatment. The main modal- MRI
ities, or image types, include: 24%
• X-ray. The oldest radiation-based imaging modality, X-rays
have been used for almost a hundred years. The major
drawback of X-ray imaging is that the radiation used can be
harmful to patients if given at too high a dose, or cumulatively.
Modern X-rays are recorded digitally.
• Magnetic resonance imaging. The gold standard for imaging
soft tissues, MRI uses magnetic fields and radio waves to
produce detailed images. But quality comes at a price and
MRI machines are both expensive and slow to produce results.
Unlike X-rays, the radiation is not harmful to patients.
• Computed tomography. In CT scans, a number of X-rays are
combined to produce a more detailed 3-D image of the body.
While a CT scan can image soft tissues, it is lower quality than
MRI. As CT scans produce images relatively quickly, they are
often found in emergency rooms where speed of diagnosis is
vital.
• Ultrasound. Often used in pre-natal scans, ultrasound employs
high frequency sound waves to produce relatively inexpensive
images without exposing the patient to radiation. As the
machines are smaller and cheaper than other modalities, ultra-
sound is a shorter-cycle business and less cyclical.
• Molecular imaging includes advanced technologies like
positron emission tomography (PET) or single photon emission
computed tomography (SPECT). These modalities are growing
faster from a low base of penetration.
We estimate the overall size of the medical imaging market at USD
32bn, with growth in the low-to-mid single-digit range. Imaging is
widely-adopted in developed markets, where volume growth is in
the low single digits, but has much higher growth rates in emerging
economies (particularly China, where volumes are low double digits)
as the installed based and procedure volumes catch up to Western
levels. Aggregate pricing is a slight headwind, with 2-3% global
like-for-like price pressure offset by software improvements and a

growing share of software in revenues. Currently, software accounts

for between one third and one half of OEM imaging revenues.
While there have periodically been concerns in the market that the Fig. 25: US advanced imaging penetration is
shift towards value-based care could reduce demand for imaging much higher than other developed countries
in Western markets, especially the US where imaging use is higher Number of CT scanners per capita
than in most other developed nations (see Fig. 25), we do not
70
expect a material negative impact. Indeed, we think this could
60
actually increase the value of accurate, efficiently-obtained diag-
50
nostic images that can help reduce the number of misdiagnoses.
40
For example, capitated payment systems, which offer a single reim-
30
bursement amount for an entire episode of care, penalize hospitals
20
that have above-average re-admission rates. So while a physician
10
will have to consider the cost of an imaging procedure, the cost
0
of missing valuable information that it may reveal should also be
Australia
Korea
Canada
United States
United Kingdom
Switzerland
Spain
OECD average
France
Russia
Germany
Italy
considered. Also, software can improve the efficiency of radiology
departments and speed up clinical work flows by reducing the time
spent by radiology staff on lower-value tasks.
With the advent of digital imaging techniques, image data can now
be incorporated into EMRs and even read and interpreted auto- Source: OECD, UBS, as of June 2018
matically by software. For example, pattern recognition software

can already label vertebrae in spinal scans, or measure the size of
blood vessels. Multiple images can be combined into complex three-
dimensional views giving physicians much greater diagnostic power.
As AI-based algorithms increase in sophistication, many images
will likely be interpreted entirely automatically in future. This could
improve both accuracy and efficiency, freeing up radiologists to con-
centrate on the most complicated cases. For example, a CT image
may take an experienced radiologist 10-20 minutes to read and
interpret, but could be analyzed in under a minute by an algorithm.
According to AI-focused diagnostic company Enlitic, radiology error
rates are about 2% for false positives and up to 25% for false Fig. 26: Imaging is an oligopolistic market
negatives; several studies have suggested computers' diagnostic Market share of medical imaging market
accuracy already exceeds that of trained human radiologists, with
Philips
lower error rates across disease areas including oncology, neurology 17%
Others
and skeletal conditions. The use of AI could be particularly helpful in
26%
emerging markets where imaging adoption is limited by the number
of trained radiologists.
The imaging market is oligopolistic, with the top three companies
having a combined market share of around 75% (see Fig. 26) and
the remainder split between a number of second-tier players. Bar-
riers to entry are high, including brand perception, reliability and Siemens
service standards and, increasingly, software innovation. From an 29%
investment perspective, most companies are small parts of larger
GE
industrial conglomerates, with only Philips and Siemens Healthi-
28%
neers materially exposed to the performance of their imaging divi-
sions.
Image-guided therapy
Image-guided therapy (IGT) combines the imaging modalities
discussed above with robotics and software to conduct mini-
mally-invasive surgical procedures. This offers a number of improve-
ments over traditional surgery, notably lower risk of complications,
shorter hospital stays and fewer complications, all of which can lead
to better outcomes and lower costs. We estimate the IGT market
size to be about USD 4bn, with growth and share dynamics similar
to imaging. IGT's slightly higher growth rate (we estimate 4%) is

driven by rising penetration of minimally-invasive surgical proce-

dures.
Radiation can also be used directly as a surgical tool, particularly in
the treatment of cancer. We estimate the size of the global radi-
ation oncology market to be USD 5bn, with growth in the low-to-
mid single-digit range although newer techniques such as MRI Linac
and proton therapy are growing faster. This market is also poised
to benefit from developments in software, allowing more accurate
treatment.
Robotic surgery and virtual reality
The use of robot assistance can improve surgical accuracy and
reduce error rates, while minimally-invasive techniques help to
reduce the trauma associated with open surgery. Robotic proce-
dures currently represent only around 2% of surgical procedures
globally, according to Citi. We expect the robot-assisted surgery
market to grow much faster as software-assisted surgical tech-
niques expand indications. This area is already seeing interest from
companies beyond the traditional medtech space: Verb Surgical, a
joint venture between Johnson & Johnson and Google, plans to
launch a surgical robot by 2020. Its total market size is around USD
5bn currently, but we estimate it could reach nearly USD 20bn by
the mid-2020s, implying a high-teens compound growth rate.
Augmented or virtual reality could have applications in surgeon
training, or even fully remote surgery. Augmented reality mixes
digital information with real-life images; healthcare applications
could include projecting health data onto a "head-up display" for
surgeons. Virtual reality refers to an entirely simulated or virtual view
and could allow surgeons to operated entirely remotely.
3-D printing
Additive manufacturing, also known as 3-D printing, is already
being used to manufacture components of medical devices such
as hearing aids. Its use could be expanded to implants for ortho-
pedics and dental applications although these come with higher
regulatory challenges than items worn outside the body. There are
also potential therapeutic applications of 3-D printing, but these
remain at an early stage of development. Some companies are
experimenting with 3-D printing technology to produce pills with
special properties that allow them to disintegrate rapidly, and early
research is underway into so-called "bio-printing" of cells or even
replacement organs. We currently see 3-D printing as more likely to
impact the cost structure and supply chain of the healthcare industry
than being a major direct revenue driver for healthcare companies.
Blockchain and healthcare

Healthcare companies generate around 5% of all the data gen-
erated globally, with both financial and clinical data moving across
different functions/areas like patients, hospitals, pharmaceutical
companies, clearing houses, payers etc. The industry suffers from an
unusual data problem, however, which is the lack of trust in sharing
or using the data. For example, it takes almost 12 years to bring
a new drug to market, as data integrity during clinical trials poses
a key challenge. Also, patients are often not comfortable sharing
their medical history with doctors or research institutions due to
confidentiality reasons.

While it is unlikely that blockchain can solve most of the problems

in the healthcare industry, it can definitely improve efficiency.We
see three areas in particular where the impact can be considerable.
The first relates to healthcare claim management. Today, healthcare
spending in the US is close to 20% of GDP, 3x the global average.
The claims and billing system is plagued with many inefficiencies like
a high rate of manual transactions and administrative complexity.
Implementing a distributed ledger like a blockchain network could
automate the majority of claim adjudication and payment process
activities and improve efficiencies like avoiding mismatches through
reconciliation of data and eliminating the need for intermediaries.
The second area relates to improvements in the pharmaceutical
industry. First, blockchain could accelerate the drug development
process. A distributed ledger could maintain the integrity of the ver-
ification process by providing time-stamped immutable records of
clinical trials or hash values to regulatory agencies like the US Food
and Drug Administration (FDA). Second, the technology could solve
the mounting counterfeit drug problem, particularly in emerging
markets. According to the US International Trade Administration,
the size of the global counterfeit drug market is estimated at USD
75–200bn, with almost half of drugs being counterfeit in some
developing countries. Implementing a blockchain network could
solve some of these problems given its clear audit trail. For example,
blockchain networks can track each step of the supply chain at the
individual product level, providing the consumer an option to verify
product authenticity.
In the long run, the biggest opportunity in the healthcare sector
from blockchain technology can be felt through its ability to con-
solidate and secure patient data. Today, patient data is fragmented
across many healthcare providers, with interoperability challenges.
Coupled with poor security protocols, data is exposed to increased
security vulnerabilities. A blockchain network could revolutionize
patient record management, putting patients in control of their own
data through identity management solutions, enabling patients to
decide how to access, share and even sell their data to medical
studies.
While the above opportunities are promising, we are still in the
early days of blockchain's impact on the healthcare sector given
the sector's complexity, size and high regulations. The low-hanging
opportunities are in the de-regulated industries, whereas in the
medium-to-long term, regulatory support is needed to increase
technology adoption as well as active participation by incumbents.
Implementing blockchain broadly will mostly benefit patients,
payers and governments by boosting efficiency. On the contrary,
intermediates whose business models are based on facilitating
healthcare data transactions, and other companies that verify or
process back-office transactions are at risk of disruption through
the successful implementation of blockchain technology in the
healthcare sector.

Table 1: HealthTech reference list - part 1

This is not a list of recommendations nor is it comprehensive
Market Estimated
Share price
Company name ISIN Country cap Price Sales
currency
(USDm) exposure
Healthcare IT - EMRs and population health
McKesson Corporation US58155Q1031 UNITED STATES 29,762 U.S. Dollar 146.4 20%
Cerner Corporation US1567821046 UNITED STATES 20,261 U.S. Dollar 59.8 100%
athenahealth, Inc. US04685W1036 UNITED STATES 6,537 U.S. Dollar 159.1 100%
HealthEquity Inc US42226A1079 UNITED STATES 5,048 U.S. Dollar 80.2 100%
Premier Inc. Class A US74051N1028 UNITED STATES 4,862 U.S. Dollar 36.0 25%
Winning Health Technology Group Co.,Ltd. Class A CNE1000016F5 CHINA 2,800 China Renminbi 11.2 100%
CompuGroup Medical SE DE0005437305 GERMANY 2,677 Euro 44.2 100%
Allscripts Healthcare Solutions, Inc. US01988P1084 UNITED STATES 2,223 U.S. Dollar 12.1 100%
HMS Holdings Corp. US40425J1016 UNITED STATES 1,946 U.S. Dollar 23.0 100%
Evolent Health Inc Class A US30050B1017 UNITED STATES 1,846 U.S. Dollar 22.4 100%
Inovalon Holdings, Inc. Class A US45781D1019 UNITED STATES 1,523 U.S. Dollar 9.8 100%
Quality Systems, Inc. US7475821044 UNITED STATES 1,280 U.S. Dollar 20.2 100%
Tabula Rasa Healthcare, Inc. US8733791011 UNITED STATES 1,246 U.S. Dollar 61.4 100%
B-Soft Co., Ltd. Class A CNE100001ZG7 CHINA 999 China Renminbi 12.8 100%
R1 RCM Inc US7493971052 UNITED STATES 967 U.S. Dollar 8.6 100%
EMIS Group plc GB00B61D1Y04 UNITED KINGDOM 753 British Pounds 8.9 90%
NNIT A/S DK0060580512 DENMARK 625 Danish Krone 161.0 50%
Castlight Health, Inc. Class B US14862Q1004 UNITED STATES 594 U.S. Dollar 4.3 100%
Medical Data Vision Co.Ltd. JP3921250001 JAPAN 581 Japanese Yen 1,624.0 100%
Cegedim SA FR0000053506 FRANCE 567 Euro 35.0 100%
NEXUS AG DE0005220909 GERMANY 520 Euro 28.5 100%
Computer Programs and Systems, Inc. US2053061030 UNITED STATES 474 U.S. Dollar 33.0 100%
Suzhou MedicalSystem Technology Co., Ltd. Class A 603990-CN CHINA 421 China Renminbi 33.2 100%
Heren Health Co., Ltd. Class A CNE100002D53 CHINA 409 China Renminbi 30.0 100%
EM Systems Co., Ltd. JP3130200003 JAPAN 380 Japanese Yen 1,148.0 100%
Software Service, Inc. JP3436020006 JAPAN 360 Japanese Yen 7,210.0 100%
Software, big data and AI companies with healthcare exposure
Cognizant Technology Solutions Corporation Class A US1924461023 UNITED STATES 46,181 U.S. Dollar 77.6 30%
iflytek Co., Ltd. Class A CNE100000B81 CHINA 10,299 China Renminbi 30.5 20%
Alibaba Health Information Technology Ltd. BMG0171K1018 HONG KONG 9,420 Hong Kong Dollar 7.3 80%
Nuance Communications, Inc. US67020Y1001 UNITED STATES 4,266 U.S. Dollar 14.2 50%
Hexaware Technologies Limited INE093A01033 INDIA 1,879 Indian Rupee 436.0 20%
Telemedicine, remote monitoring and wearables
M3, Inc. JP3435750009 JAPAN 13,431 Japanese Yen 4,625.0 30%
Garmin Ltd. CH0114405324 UNITED STATES 11,583 U.S. Dollar 60.0 25%
Ping An Healthcare and Technology Company Limited KYG711391022 HONG KONG 7,283 Hong Kong Dollar 53.0 70%
Teladoc Inc US87918A1051 UNITED STATES 3,887 U.S. Dollar 61.4 100%
iRhythm Technologies, Inc. US4500561067 UNITED STATES 1,902 U.S. Dollar 79.0 100%
Fitbit, Inc. Class A US33812L1026 UNITED STATES 1,793 U.S. Dollar 7.1 100%
Vocera Communications, Inc. US92857F1075 UNITED STATES 901 U.S. Dollar 30.4 60%
Source: FactSet, UBS. Market data, as of 21 June 2018. Note: McKesson Corporation inclusion based on estimated income contribution from Change Healthcare (JV with Blackstone).
Important note: This is a reference list containing companies with market capitalization of at least USD 250m and a
minimum 20% estimated sales exposure to our preferred investment areas within the HealthTech theme. Please note
that this list is only for reference, and is not a recommendation list.

Table 2: HealthTech reference list - part 2

This is not a list of recommendations nor is it comprehensive
Market Estimated
Share price
Company name ISIN Country cap Price Sales
currency
(USDm) exposure
Imaging and IGT
Siemens Healthineers AG DE000SHL1006 GERMANY 42,325 Euro 36.7 70%
Royal Philips NV NL0000009538 NETHERLANDS 39,672 Euro 35.9 55%
Varian Medical Systems, Inc. US92220P1057 UNITED STATES 10,856 U.S. Dollar 117.0 100%
Elekta AB Class B SE0000163628 SWEDEN 5,064 Swedish Krona 117.9 100%
Ion Beam Applications SA BE0003766806 BELGIUM 817 Euro 23.9 100%
Agfa-Gevaert NV BE0003755692 BELGIUM 645 Euro 3.3 45%
ViewRay, Inc. US92672L1070 UNITED STATES 550 U.S. Dollar 7.1 100%
Accuray Incorporated US0043971052 UNITED STATES 360 U.S. Dollar 4.0 100%
Robotic surgery, 3D printing & digital production
Intuitive Surgical, Inc. US46120E6023 UNITED STATES 55,226 U.S. Dollar 485.1 100%
CYBERDYNE Inc. JP3311530004 JAPAN 2,612 Japanese Yen 1,333.0 35%
3D Systems Corporation US88554D2053 UNITED STATES 1,704 U.S. Dollar 14.2 25%
Mazor Robotics Ltd IL0011068553 ISRAEL 1,490 Israeli Shekel 102.9 100%
Stratasys Ltd. IL0011267213 UNITED STATES 1,101 U.S. Dollar 19.0 20%
TransEnterix, Inc. US89366M2017 UNITED STATES 802 U.S. Dollar 3.9 100%
Drug development and CROs
IQVIA Holdings Inc US46266C1053 UNITED STATES 21,366 U.S. Dollar 104.7 100%
Laboratory Corporation of America Holdings US50540R4092 UNITED STATES 19,147 U.S. Dollar 187.3 30%
WuXi AppTec Co., Ltd. Class A 603259-CN CHINA 16,263 China Renminbi 91.4 100%
Veeva Systems Inc Class A US9224751084 UNITED STATES 12,123 U.S. Dollar 83.4 100%
ICON Plc IE0005711209 UNITED STATES 7,345 U.S. Dollar 136.3 100%
PRA Health Sciences, Inc. US69354M1080 UNITED STATES 6,117 U.S. Dollar 95.6 100%
Medidata Solutions, Inc. US58471A1051 UNITED STATES 5,029 U.S. Dollar 83.5 100%
Source: FactSet, UBS. Market data as of 21 June 2018
Important note: This is a reference list containing companies with market capitalization of at least USD 250m and a
minimum 20% estimated sales exposure to our preferred investment areas within the HealthTech theme. Please note
that this list is only for reference, and is not a recommendation list.

Appendix
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Disclosures (28 June 2018)

Within the past 12 months UBS AG, its affiliates or subsidiaries may have received or provided investment services
and activities or ancillary services as per MiFID II which may have given rise to a payment or promise of a payment in
relation to these services from or to each company mentioned in the publication.
3D System 6, Accuray Incorporated 5, 6, Allscripts Health 6, Athenahealth 6, Cerner Corp. 6, Cognizant Technology
6, 7, 8, 9, 10, Computer Programs and Systems, Inc. 6, Evolent Health Inc Class A 6, Fitbit Inc 5, 6, Garmin Ltd 3, 6,
HealthEquity Inc 5, 6, HMS Holdings Corp. 6, Icon PLC 6, Inovalon Holdings, Inc. Class A 6, Intuitive Surgical 6, 9, 10,
IQVIA Holdings Inc 6, 7, Laboratory Corporation of America Hldg 6, Mazor Robotics Ltd 6, McKesson Corporation 6,
Medidata Solutions, Inc. 6, Nuance Communications, Inc. 6, Ping An Healthcare and Technology Company Limited
1, 2, PRA Health Sciences Inc 6, Premier-A 6, Quality Systems 6, R1 RCM Inc 6, Royal Philips 1, 6, 7, 11, Siemens
Healthineers 1, 2, 12; Stratasys 5, 6, Tabula Rasa HealthCare Inc 6, 7, 8, Teladoc Inc 6, TransEnterix, Inc. 6, Varian
Medical Systems, Inc. 6, 9, 10, Veeva Systems Inc Class A 6, Vocera Communications, Inc. 6, WuXi AppTec Co., Ltd.
Class A 3, 4,
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than investment banking services from this company.

Appendix
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UBS CIO WM equity selection system
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Current UBS global rating distribution (as of last month-end)

Buy 47.85% (28.48%*) . . .
Neutral 37.00% (23.41%*) . . .
Sell 12.84% (13.22%*) . . .
Suspended 2.18% (54.00%*) . . .
Discontinued 0.13% (33.33%*) . . .
Terms and Abbreviations

Term / Abbreviation Description / Definition Term / Abbreviation Description / Definition
1Q, 2Q, etc. or 1Q11, First quarter, second quarter, etc. or first A actual i.e. 2010A
2Q11, etc. quarter 2011, second quarter 2011, etc.
bn Billion Capex Capital expenditures
COM Common shares E expected i.e. 2011E
GDP Gross domestic product MP Marketperform: The stocks expected
performance is in line with the sector
benchmark
NAV Net asset value Shares o/s Shares outstanding
UP Underperform: The stock is expected to CIO UBS WM Chief Investment Office
underperform the sector benchmark
x multiple / multiplicator

Appendix
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• The HealthTech theme identifies a number of related

Fig. 1: Healthcare is one of the least digitized

UBS CIO WM 28 June 2018 2

These trends are having a number of important effects on health 6%

So far, the healthcare industry has been better at generating data

better use of the vast mountain of data produced daily by healthcare

Changing social perspectives

UBS CIO WM 28 June 2018 4

Value-based care and HealthTech Fig. 5: Smartphone penetration is rising

Value-based care: Measuring outcomes 10%

models are evolving to align the interests of providers with both

UBS CIO WM 28 June 2018 5

All of these tasks require greater use of technology and exploitation

rise (see Fig. 7).

• In emerging markets, particularly China, we see opportunity

access to care, perhaps using simpler more cost-effective tools

UBS CIO WM 28 June 2018 6

UBS CIO WM 28 June 2018 7

on their ability to practice across state lines, which presents

UBS CIO WM 28 June 2018 8

Fig. 8: Overview of longer-term investment

is a main cause of mortality and poverty persistence. Innovative

UBS CIO WM 28 June 2018 9

currently include patient consumer experience, personalized health

Manager selection matters, but so does portfolio construction.

UBS CIO WM 28 June 2018 10

Appendix: Defining the evolving HealthTech

Software, artificial intelligence and big data

UBS CIO WM 28 June 2018 11

a number of European healthcare systems have invested in digitizing

Revenue cycle management (RCM) software is used by hospital 6 5.3

We estimate the size of the healthcare IT market size to be about

Source: UBS estimates, as of June 2018

the growing volume of health data. Indeed, a recent study by the

UBS CIO WM 28 June 2018 13

Unlike health IT companies, consumer tech companies tend to have

Telemedicine and remote monitoring 50%

More specifically, this can include "live" interactions such as simple

is also likely to improve adoption by patients.

UBS CIO WM 28 June 2018 14

Apple's Health Records feature, for example, is available with iOS

UBS CIO WM 28 June 2018 15

While the Chinese government has succeeded in introducing near-

Applications of technology in drug development

of digital technologies may eventually become a success factor for 63.2%

to emerge in the outsourced R&D provider market, in our view.

UBS CIO WM 28 June 2018 16

achieve many of the gains highlighted above, including opti- 30%

Beyond improving trial efficiency, we see opportunities to enhance 0%

UBS CIO WM 28 June 2018 17

started to use big data analysis to speed up clinical trial processes,

UBS CIO WM 28 June 2018 18

growing share of software in revenues. Currently, software accounts

matically by software. For example, pattern recognition software

UBS CIO WM 28 June 2018 19

driven by rising penetration of minimally-invasive surgical proce-

Blockchain and healthcare