Longer Term Investments Healthtech

Longer Term Investments HealthTech

Chief Investment Office GWM | 17 September 2019 5:17 pm BST Lachlan Towart, Analyst; Sundeep Gantori, CFA, CAIA, Analyst

• 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 pressuring healthcare budgets worldwide, spurring healthcare providers to explore new technologies that could improve outcomes and lower 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. • 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 is one of the world's least digitized industries despite generating 5% of its data. Recognition that digital technology can help control costs and improve health outcomes is growing. As the global population ages and healthcare expenses rise faster than GDP, the need for HealthTech, made possible by increases in processing power and ever-greater connectivity, is becoming clearer. We view digitization as one of a group of trends in healthcare delivery. Developed market healthcare systems are starting to align the interests of payers and providers better. The resulting "value- based" reimbursement models place greater demands on health data systems. Patients are also not only becoming more price-sensitive; they want to take increasing charge of their own health. In emerging markets, remote technology offers the chance to broaden the reach of health coverage. The current markets linked to the HealthTech theme, we estimate, exceed USD 100bn. Newer opportunities, including population health and telemedicine, have potentially large, if uncertain, total addressable markets. Their successful adoption could push the theme's overall growth rate into the upper single digits or even higher 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 or impact 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. Longer Term Investments

Fig. 1: Healthcare is one of the least digitized HealthTech: Making healthcare more efficient industries

Healthcare is one of the least digitized of the major global industries Level of ICT (see Fig. 1). Yet the industry generates 5% of all data worldwide, we digitalisation Media estimate, and evidence is growing that healthcare providers, insurers, Finance & Insurance and even drug companies are looking to harness it to improve the effi- Healthcare Retail Oil & Gas ciency and slow the relentless rise of healthcare spending. We group Food & Beverages Automotive / Discrete together the various related technologies and market opportunities Mining & Metals under the HealthTech theme. Utilities Agriculture Buildings Chemicals Its key drivers are the need for greater efficiency in healthcare delivery, Marine Industrial end markets Rail & Road Logistics Other industries Time the rapid growth of processing power that enables big data analysis and artificial intelligence (AI), and better connectivity permitting care Source: Based on ABB, slightly adjusted by UBS. As of May to move outside the hospital. We see two broad ways in which 2017. Note: ICT = Information and Communications Tech- nology HealthTech companies can make healthcare more efficient: • Improve outcomes. AI-assisted diagnostics that consider all available evidence, predictive analytics to detect hidden co-mor- bidities, and individualized drugs with 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 diminishing quality can all help reduce the cost of healthcare. According to Cotiviti, nearly USD 1trn of annual US healthcare spending is wasted. In the past year the theme has developed and matured as a new crop of healthcare IT companies has joined the public markets. Potentially disruptive technology-driven startups are also gaining market share in the US managed-care market. Big software and consumer technology companies continue to explore the market, and venture capital For further reading: funding for the industry has remained robust this year. • "Longer Term Investments – Medical Devices," 11 April At the core of HealthTech is the ability to store, retrieve, and analyze • "Longer Term Investments – Generics," 15 the vast mountain of healthcare data, which we estimate will reach August 2018 2.2 zettabytes by 2020. We also consider adjacent technologies involved in automating treatment and diagnosis. Examples include: • "Longer Term Investments – HealthTech," 28 June 2018 • Population health software that applies big data analytics to • Longer Term Investments – Enabling tech- proactively manage the health of a large group of patients at nologies," 21 May 2018 lower cost than current volume-driven approaches. • "Corporate Health – UBS Wealth Man- Telemedicine to lower the cost of care by shifting treatment • agement White Paper," 2 November 2017 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.

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The vision of a fully integrated, connected, and data-centric Fig. 2: Life expectancy is rising worldwide healthcare system is appealing. But technical, commercial, regulatory, Life expectancy at birth, years and social hurdles to digitizing healthcare stand in the way. Progress 100 is unlikely to be linear. We expect the viability of business models to 95 become gradually clear and for new opportunities to open up. 90 85 80 Key drivers of the HealthTech theme 75 Here we set out the factors that support the adoption of HealthTech 70 and summarize its potential practical applications. 65 60 0 0 0 0 0 0 0 0 0 0 0 0 0

The need for change: Aging is driving an unsustainable rise in 8 9 0 1 2 3 4 5 6 7 8 9 0 9 9 0 0 0 0 0 0 0 0 0 0 1 healthcare costs 1 1 2 2 2 2 2 2 2 2 2 2 2 China Japan Healthcare spending has long been seen to be on an unsustainable Latin America United States of America path in many developed economies. Despite a growing awareness of Western Europe World the problem, there appears little respite in sight for both developed Source: UN, UBS, as of 2019 and developing economies: • Demand for healthcare shows no signs of slowing. Life Fig. 3: Healthcare costs are rising as a share of GDP expectancy is rising in both developed and developing markets. worldwide The over-65 population, which accounts for two thirds of National healthcare expenditure as a share of GDP healthcare spending, will likely more than double by 2050 18% (see Fig. 2). Also, ongoing urbanization in the emerging world 16% increases the prevalence of "lifestyle diseases" like obesity and 14% diabetes. 12% 10% • Healthcare expenses are rising relentlessly, driven by both 8% 6% higher utilization and underlying cost inflation. OECD countries 4% alone spent USD 6.5trn on healthcare in 2016 and expenditure 2% 0%

is also rising rapidly in the developing world (see Fig. 3). Costs 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

are projected to keep rising: in the US, the Centers for Medicare 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 and Medicaid Services (CMS) predicts that healthcare expenses United States Switzerland will exceed 19% of GDP by 2027 (see Fig. 4). France Germany Japan United Kingdom These trends are affecting healthcare delivery and consumption. Source: World Bank, as of August 2019. Note: due to Payers are focusing on preventive care and population health: we see change in availability of data, pre-1995 values shown in a shift to new reimbursement systems that reward quality and value previous reports are not comparable. of care instead of the quantity of services delivered. Equally, patients are becoming more like consumers, paying more out-of-pocket but Fig. 4: Healthcare costs are expected to keep taking a greater interest in their health choices. climbing HealthTech can exploit the rapid growth of healthcare data US healthcare expenditure as a share of GDP While technology is only slowly creeping into healthcare provision, 20% the industry is already overwhelmed with data. UBS estimates that healthcare will account for 5% of all data generated globally, or 19% roughly 2.2 zettabytes, by 2020. To put this into perspective, it is almost twice the total amount of data generated globally across all 18% industries in 2010, highlighting the exponential growth in healthcare data alone. By 2030, based on our latest estimates, the healthcare 17% industry should generate more than 23 zettabytes of data, which is 16% more than 10 times the size of data the industry is expected to gen- 0 2 4 6 8 0 2 4 6 1 1 1 1 1 2 2 2 2 0 0 0 0 0 0 0 0 0 erate in 2020, or roughly the total amount of data generated globally 2 2 2 2 2 2 2 2 2 across all industries in 2017. US healthcare spend as a percent of GDP Projected So far the healthcare industry has been better at generating data Source: CMS, as of June 2018 than using it. But advances in AI and data-handling technologies, as well as improvements in connectivity, suggest the industry may finally

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be reaching a tipping point. From a practical perspective, electronic health records are now widely adopted in many Western markets and regulators are focused on driving inter-operability across healthcare IT systems. Meanwhile, a raft of start-ups and established software companies are exploring how to integrate AI, big data, and 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. Smartphone-enabled telemedicine enables patients to access care whenever and wherever it suits them, while saving costs for health insurers. Adoption is still in its early stages: while many consumers, especially millennials, turn to the internet for basic health advice (the so-called "Dr. Google") and finding physicians, the penetration of telemedicine and wearable devices is still low (less than 10% and 20%, respectively, according to Rock Health). Telemedicine in particular could improve access to care in the emerging world. Technology companies and VCs see the opportunity Healthcare is a complex and heavily regulated industry. Important regulations often differ at national and even regional levels and are subject to frequent change. For this reason, the core healthcare IT market has historically been relatively unattractive to large enterprise IT companies that seek scalable products with a global market opportunity. But this may be changing: as the demands on healthcare IT systems change, and regulators demand new standards to ensure interoperability, the analysis of data, rather than just its collection and processing, becomes more valuable. Already, software companies are investing in multiple health-related projects, while consumer-focused technology companies look to partner with established healthcare companies. Wearable devices in particular could offer a route into the industry for companies with respected consumer brands. Startups are also developing a number of new products at the intersection of health and technology, backed by a wave of venture capital (VC) investment. Since 2010, over USD 50bn of VC funding has poured into the sector, according to data from Pitchbook. Last year was the most active on record, with USD 14bn invested. Technology is beginning to disrupt US managed care A growing number of VC-backed startups are seeking to disrupt the US managed care industry by using technology to offer patients a more personalized and consumer-focused service. The hypothesis is that technology can simplify the health management experience for patients, translating into more coherent management of their health and focusing on preventive care. This should reduce waste and unnecessary care, leading to lower total costs. Data is beginning to bear this out: for example, Alignment Healthcare has reported that its hospital admission rate is 30% lower than for traditional Medicare MCOs,

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while Google-backed Clover Health has claimed a 23% reduction in hospital admissions for its high-risk members. The company ana- lyzes health data with a proprietary algorithm and uses the results of genomic testing to lower costs while improving its members' medical outcomes. The conclusions that can be drawn from the early success of these companies are limited. Few of them operate at a national scale, and they have yet to capture a material share of the managed care market, so the results may represent statistical quirks or be skewed by biases among their covered lives. But as more data flows in, we expect interest in technology-enabled managed care platforms to grow: the sector has garnered significant VC investment, including from tech and traditional managed care firms. If the disruptors can control costs better than the industry at large, we would expect the more established companies to either seek to build their own solutions or acquire the disruptors outright. Internet-enabled healthcare in China Another area where HealthTech is already transforming healthcare is the Chinese telemedicine market. Accessing primary care is difficult for many Chinese patients, who often need to queue for hours for a short appointment with a hospital-based doctor. Companies like Good Doctor and WeDoctor seek to address this situation by offering online health platforms supported by artificial intelligence algorithms that can make simple diagnoses. More complex cases are switched seamlessly to real doctors within the app, and patients can schedule offline appointments or order medication through the app for home delivery. 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 interactions have changed attitudes to sharing personal data and information. Privacy justifiably remains a concern, however. While millennials 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. But a number of the challenges will need to be addressed before HealthTech technologies are adopted more widely. Healthcare is, for good reason, heavily regulated, and regulatory change tends to come slowly. Regulations differ around the world and even sometimes 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

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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 We see the emerging growth of HealthTech applications as part of a broader set of trends, with both payers and patients affected financially by the rising cost of healthcare provision. Healthcare payers (typically governments and insurers) are exploring new reimbursement models that incentivize quality of care and greater value for money. Meanwhile, on the patient side, behavior is changing and price elasticity is increasing as costs are shifted to the user. The former trend is likely positive for treatment outcomes, while the latter has the potential to be negative if not carefully managed. Both provide opportunity for companies in the HealthTech theme, in our view. Value-based care: Measuring outcomes We believe many healthcare systems are at the early stages of a funda- mental change in how healthcare is paid for. Reimbursement models are evolving to align the interests of providers with both payers and patients, by linking the price paid to the outcomes achieved, rather than the volume of service provided and encouraging 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 reimbursement". Value-based care is not yet widely adopted, though many countries have begun to experiment with alternative payment models that reward better quality of care through financial incentives. New reimbursement models include bundled payments, value-based payments, shared-risk frameworks, and capitated payments. All have been explored in the US since the enactment of the Affordable Care Act in 2010. While the transition to value-based reimbursement will undoubtedly take time, we think the direction of the move is already clear and expect alternative reimbursement schemes to be a key element of controlling the rise of healthcare costs. Merely reducing waste can create huge savings: according to healthcare IT firm Cotiviti, up to USD 1trn is wasted in the US healthcare system annually, of which USD 600bn is due to unnecessary care and inappropriate payments. Savings could also be made by engaging patients and spreading clinical and operational best practices. 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 decision guidance, work-flow management for complex clinical cases, and co-ordination across multi-disciplinary teams. This puts HealthTech at the core of the transition to value-based care.

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Healthcare "consumerization" supports the HealthTech theme In the developed world, the rise in healthcare costs has forced health insurance policies to become less generous. This is most obviously seen with the rise of high-deductible health plans (HDHP's) in the US (see Fig. 5). As patients pay out-of-pocket for more of their healthcare, they become more price sensitive: the price elasticity of healthcare demand is increasing. This can have a negative impact on health outcomes. For instance, data from UBS Evidence Lab shows that patients are more likely to skip prescriptions as their co-pays rise (see Fig. 6). But patients are also becoming more involved in their care, facil- Fig. 5: Growth of high-deductible plans in the US itated by technology changes and the easier availability of health Share of workers with high deductibles, and average data, such as via smartphone apps. We believe this is a desirable deductible (USD) trend: the focus on outcomes puts more emphasis on prevention, and 1,800 70% more health-aware consumers should be less of a burden overall to 1,600 60% 1,400 50% health systems. We see these trends supporting various aspects of 1,200 the HealthTech theme, including wearable devices, telemedicine and 1,000 40% 800 30% remote monitoring. Finally, many consumers are also turning to "con- 600 20% sumer genomics" companies to learn more about their background 400 and, increasingly, their own health. 200 10% 0 0% 9 0 1 2 3 4 5 6 7 8 0 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0

HealthTech is not just an IT vertical 2 2 2 2 2 2 2 2 2 2

HealthTech is not just a vertical in the broader IT market. Just as Average deductible (USD) USD 1,000 or more "fintech" describes a specific set of applications of technology to USD 2,000 or more solve specific problems in the financial sector, we use the term Source: Kaiser Employer Health Benefits 2018 Annual "HealthTech" to refer to the evolving use of IT to address the general Survey. Note: deductible for single coverage. problem of efficiency and cost constraints in providing healthcare. While the theme has connections to other ones, including consumer technology (e.g. wearables) and enabling technology (e.g. artificial Fig. 6: Patients abandon prescriptions as costs rise intelligence and big data analytics), we view these applications as a Rejected prescriptions, by size of co-pay discrete set of overlapping opportunities. 3,000 90% 80% 2,500 The current markets linked to HealthTech exceed USD 100bn of rev- 70% enues by our estimates. Opportunities like population health and 2,000 60% telemedicine have potentially large, if uncertain, total addressable 50% 1,500 markets. Their successful adoption could drive the theme's overall 40% growth rate into the upper single digits or higher over the next 1,000 30% 20% decade. Below we highlight the main segments of the current market. 500 10% For a more detailed review, please refer to our report "Longer Term 0 0% ) 6 5 0 5 0 5 0 5 0 5 0 5 0 5 0 5 0 5 k

Investments – HealthTech," published 28 June 2018. 0 1 3 4 6 7 9 2 3 5 6 8 9 1 2 4 5 5 n ------1 1 1 1 1 1 2 2 2 2 2 1 a 1 6 1 6 1 6 ------l > 1 3 4 6 7 1 6 1 6 1 6 1 6 1 6 1 b ( 9 0 2 3 5 6 8 9 1 2 4

Software, AI, and big data. The ability to store, retrieve, r

• 1 1 1 1 1 1 1 2 2 2 o

and analyze health data electronically is at the core of the 1 < HealthTech theme. Electronic medical records (EMRs) are now Reversed claims Completed claims widely adopted and are largely a replacement market in the % reversed claims (RHS) US. Revenue cycle management software, which aids payment accuracy and revenue collection, should continue to grow at a Source: UBS Evidence Lab, as of September 2017 mid-teen rate given the growing complexity of reimbursement. Together, the core healthcare IT markets represent USD 25bn, we estimate. Industry enthusiasm for population health software has waned, but we believe this is a temporary phenomenon as payers will ultimately need to capitalize on the data stored in EMRs; we view population health and other next-generation healthcare IT solutions as primarily opportunities for the coming decade. Esti- mating the extent of these opportunities is difficult; we think a

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conservative assumption is that it can reach current EMR system sales of USD 25bn in 10 years. • Telemedicine and remote monitoring. Telemedicine helps to match regional supply and demand, lower costs, and improve access to care for patients in markets with less established healthcare infrastructure. New 5G networks should increase connectivity speeds and make it easier and safer to transmit critical health information wirelessly. The market opportunity in the US alone could exceed USD 80bn, according to Citi estimates. We think a similar opportunity might exist outside the US. Wearables are being rapidly adopted in consumer fitness tracking and are gradually incorporating more medical-grade sensors. They could provide an early warning about an individual's health risks by continuously collecting vital signs and improving the quality of diagnostic data. • Drug development applications. Better use of data could improve clinical trial efficiency, speeding drugs to market and improving pharma NPV. Pharma companies have begun to experiment with incorporating "real world evidence" in the drug approval process, and regulators appear open to innovation involving data collection. The most accessible way for investors to gain exposure to these developments is through contract research organizations (CROs) that provide outsourced R&D services to the pharma and biotech industry. Currently this is a USD 35bn industry growing at a high single digit rate. • Imaging, image-guided surgery, and robotic surgery. The diagnostic imaging market provides a practical example of how advanced software and AI are already being used to make healthcare delivery more efficient by combining image data with software. Image-guided and robotic surgery techniques also can cut healthcare costs by reducing surgical complications and shortening hospital stays. We estimate the overall size of the medical imaging market at US 32bn. The trend growth rate is in the low-to-mid single digits, although growth has been running above trend in recent years due to a catch-up in hospital capital investment. Related markets such as image-guided therapy and radio oncology add another USD 10bn opportunity, with a growth rate in the mid-single digits. Robotic surgery is currently a high-growth area within the broader medical technology field, and still represents less than 20% of applicable surgical pro- cedures. Should adoption rates expand we see a potential USD 20bn opportunity by the mid-2020s, implying a high-teens com- pound growth rate. Regional perspectives on technology impact in healthcare The impact of technological changes is likely to be felt differently in economies at different stages of development. Currently, we see at least three ways in which HealthTech can help shape the future of healthcare across different regions: • In developed markets, particularly the US insurance-led system, digitization and automation can help reduce inefficiencies across

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existing healthcare systems, improving outcomes while lowering the total cost of care. • 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 particularly important element of this opportunity. • Similarly, in frontier markets, such as many African nations, telemedicine could be a powerful tool in government and non-government organization (NGO)-backed efforts to increase 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 The underlying demographic trends driving healthcare demand are strong and long-lasting. In our view, technology will be critical to improving outcomes and controlling costs. This is becoming clear to companies, investors, and policymakers. We expect healthcare digitization to increase and foresee more partnerships between healthcare and technology companies, with further encroachment into the healthcare arena by both consumer and technology players. A number of HealthTech companies have listed in public markets in the past year and VC funding for the industry has gone on growing. We expect these dynamics to continue as the industry matures. Given the diversity of the theme and the uncertain size of its end-markets at present, we advise against trying to pick winners at this stage. Some of the identified 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. Compe- tition is likely to intensify and involve companies from the technology and consumer sectors. So we recommend a diversified approach to investing in the theme. For long-term investors willing to accept illiquidity, the HealthTech theme may offer attractive opportunities to gain direct exposure via private equity or impact 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 algorithms, and patients will need to be re-assured their data is protected. 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 Portability and Accountability Act (HIPAA) of 1996 although its provisions 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, General Data Pro- tection Regulation (GDPR) contains provisions to safeguard all personal data. Beyond concerns about its legitimate use, theft of

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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 barriers 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 currently limits the ability of drug companies to negotiate outcomes-based pricing con- tracts, 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 technical standards allowing interoperability of health IT systems may require legislation. • Social and ethical issues. The delegation of partial or complete 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 computer 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. Link to Sustainable Investing We believe investing in HealthTech fits our sustainable investing framework. The theme is aligned to Sustainable Development Goal (SDG) 3 (Good Health and Well-Being) due to its aim to improve efficiency in the healthcare system, and to SDG 1 (Ending Poverty) given the aim to provide access to basic services to all, particularly in developing countries, by 2030. HealthTechis especially impactful in developing countries where limited access to health services is a main causeof mortality and poverty persistence. Innovative approaches that allow doctors to consult and diagnose remotely, carry out disease surveillance, and other e-health initiatives, can help address target SDG 3.d on "strengthening the capacity of all countries, particularly developing ones, for early warning, risk reduction and management of national and global health risks". Digitalization of health services could also improve the monitoring of the indicators needed to track progress. To learn more about SDG 3 please read our publication Aligning with SDG #3: Good Health and Well-being, published 28 August.

Rachel Whittaker, Sustainable Investing Strategist Melissa Spinoso, Sustainable Investing Analyst

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HealthTech and venture capital Fig. 7: Venture capital investment in HealthTech companies Long-term investors willing to accept illiquidity may gain a more direct Number of deals and funds invested (USD billions) exposure to HealthTech opportunities through private equity invest- 2,000 16 ments rather than in listed equities. 1,800 14 1,600 1,400 12 Private equity investors and especially VC funds are the primary source 1,200 10 1,000 8 of capital for digital health companies. Since 2010, over USD 50bn of 800 6 600 VC funding has been poured into the sector, according to data from 400 4 200 2 Pitchbook. Last year was the most active year on record, with USD 0 0 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 d t 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 y

14bn invested. Data for this year suggests that total funding could 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 9 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 1 surpass it (see Fig. 7). 0 2 VC investments can provide access to high-growth companies in all No of deals Funds invested (USD bn) stages of their development, with the potential for high returns, in our view. But such investments naturally come with risks. Besides the Source: Pitchbook, as of August 2019. Note: Includes deals defined as "HealthTech" and "Digital Health" inherently higher failure rate of startup companies, VC investments sectors. differ greatly from those in listed shares. VC is essentially an opaque and illiquid market. Different market par- ticipants have access to different amounts of information. Funding usually consists of multiple rounds of private financing by investors who purchase newly issued, unlisted securities. Each round triggers a capital increase and raises the risk of ownership dilution. Also, share- holder rights such as voting, veto, exit, and liquidation rights can differ greatly between founders and investors. Securing access to the best fund managers to mitigate these risks is critical to maximizing the chances of success. Competition among VC managers to fund the best companies is also very high. Investors should seek partnership with managers who are actively sourcing deals and taking a leading role in the companies in which they invest, as opposed to employing a follower strategy and focusing solely on unicorns and bigger deals. 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, geographies, managers, etc. Importantly, VC exposure should be considered 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.

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Non-Traditional Assets

Non-traditional asset classes are alternative investments that include hedge funds, private equity, real estate, and managed futures (collectively, alternative investments). Interests of alternative investment funds are sold only to qualified investors, and only by means of offering documents that include information about the risks, performance and expenses of alternative investment funds, and which clients are urged to read carefully before subscribing and retain. An investment in an alternative investment fund is speculative and involves significant risks. Specifically, these investments (1) are not mutual funds and are not subject to the same regulatory requirements as mutual funds; (2) may have performance that is volatile, and investors may lose all or a substantial amount of their investment; (3) may engage in leverage and other speculative investment practices that may increase the risk of investment loss; (4) are long-term, illiquid investments, there is generally no secondary market for the interests of a fund, and none is expected to develop; (5) interests of alternative investment funds typically will be illiquid and subject to restrictions on transfer; (6) may not be required to provide periodic pricing or valuation information to investors; (7) generally involve complex tax strategies and there may be delays in distributing tax information to investors; (8) are subject to high fees, including management fees and other fees and expenses, all of which will reduce profits.

Interests in alternative investment funds are not deposits or obligations of, or guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other governmental agency. Prospective investors should understand these risks and have the financial ability and willingness to accept them for an extended period of time before making an investment in an alternative investment fund and should consider an alternative investment fund as a supplement to an overall investment program.

In addition to the risks that apply to alternative investments generally, the following are additional risks related to an investment in these strategies:

• Hedge Fund Risk: There are risks specifically associated with investing in hedge funds, which may include risks associated with investing in short sales, options, small-cap stocks, “junk bonds,” derivatives, distressed securities, non-U.S. securities and illiquid investments. • Managed Futures: There are risks specifically associated with investing in managed futures programs. For example, not all managers focus on all strategies at all times, and managed futures strategies may have material directional elements. • Real Estate: There are risks specifically associated with investing in real estate products and real estate investment trusts. They involve risks associated with debt, adverse changes in general economic or local market conditions, changes in governmental, tax, real estate and zoning laws or regulations, risks associated with capital calls and, for some real estate products, the risks associated with the ability to qualify for favorable treatment under the federal tax laws. • Private Equity: There are risks specifically associated with investing in private equity. Capital calls can be made on short notice, and the failure to meet capital calls can result in significant adverse consequences including, but not limited to, a total loss of investment. • Foreign Exchange/Currency Risk: Investors in securities of issuers located outside of the United States should be aware that even for securities denominated in U.S. dollars, changes in the exchange rate between the U.S. dollar and the issuer’s “home” currency can have unexpected effects on the market value and liquidity of those securities. Those securities may also be affected by other risks (such as political, economic or regulatory changes) that may not be readily known to a U.S. investor.

Emerging Market Investments Investors should be aware that Emerging Market assets are subject to, amongst others, potential risks linked to currency volatility, abrupt changes in the cost of capital and the economic growth outlook, as well as regulatory and socio-political risk, interest rate risk and higher credit risk. Assets can sometimes be very illiquid and liquidity conditions can abruptly worsen. CIO GWM generally recommends only those securities it believes have been registered under Federal U.S. registration rules (Section 12 of the Securities Exchange Act of 1934) and individual State registration rules (commonly known as "Blue Sky" laws). Prospective investors should be aware that to the extent permitted under US law, CIO GWM may from time to time recommend bonds that are not registered under US or State securities laws. These bonds may be issued in jurisdictions where the level of required disclosures to be made by issuers is not as frequent or complete as that required by US laws. For more background on emerging markets generally, see the CIO GWM Education Notes, Emerging Market Bonds: Understanding Emerging Market Bonds, 12 August 2009 and Emerging Markets Bonds: Understanding Sovereign Risk, 17 December 2009. Investors interested in holding bonds for a longer period are advised to select the bonds of those sovereigns with the highest credit ratings (in the investment grade band). Such an approach should decrease the risk that an investor could end up holding bonds on which the sovereign has defaulted. Sub-investment grade bonds are recommended only for clients with a higher risk tolerance and who seek to hold higher yielding bonds for shorter periods only.

12 Longer Term Investments

Appendix

Terms and Abbreviations Term / Abbreviation Description / Definition Term / Abbreviation Description / Definition A actual i.e. 2010A COM Common shares E expected i.e. 2011E GDP Gross domestic product H half year Shares o/s Shares outstanding UP Underperform: The stock is expected to CIO UBS WM Chief Investment Office underperform the sector benchmark

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