AU2005208883A1 - Portfolio selection for (healthcare) technology investment - Google Patents

Description

WO 2005/072357 PCT/US2005/002443 PORTFOLIO SELECTION FOR HEALTHCAREE) TECHNOLOGY INVESTMENT Reference to Related Application The present application claims the benefit of U.S. Provisional Patent Application No. 60/539,331, filed January 28, 2004, whose disclosure is hereby incorporated by reference in 5 its entirety into the present disclosure. Field of the Invention The present invention relates to selection of portfolios and their management and more particularly to a system and method for investing in a 'vertical' market sector in healthcare or other research-intensive fields. The present invention has general applicability 10 to forming investment vehicles. Description of Related Art Portfolio investing is generally considered to mitigate risk. Various methodologies for selection of elements of a portfolio as well as allocation of resources and maintenance have been developed and are in widespread use. Numerous strategies are described in an 15 extensive literature and practiced broadly in the fund management industry. It is common practice to create, using various selection strategies, field or sector-specific investment portfolios. Such portfolios require classification within the sector from which companies are drawn according to generally agreed upon criteria. As examples, portfolios may be drawn from 'the financial sector', 'manufacturing', transportation, energy, defense, healthcare, 20 mining and so forth. The rationale for such structuring of investment choices generally is related to what are believed to be shared attributes / responses of companies grouped within such portfolios. Within such broad classifications, it is also common to create sub-groupings according to attributes such as 'product', end-user, technology base etc.. The terms 'vertical' and 'horizontal' are often used to characterize markets which in the first instance are 25 particular to a cluster of companies selected according to basic technology and end-user (such

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WO 2005/072357 PCT/US2005/002443 as supply chain companies in relation to the energy sector) and in the second instance are related to sector characteristics of companies (such as energy retailers). It is obvious that the designation of axes is an arbitrary but useful convention. Managed investment vehicles known in the art include but are not limited to UITs 5 (unit investment trusts) ETFs (exchange traded funds), private equity funds such as venture investment pools, mutual funds etc.. Generally such vehicles allow investors to buy small pieces of the vehicle as "units" or shares. A purchaser of such units or shares seeks to gain from management of the vehicle and the ability to diversify at relatively small scale. Managed investment vehicles may be listed on an exchange and trade just like stocks. They 10 are not usually a vehicle for capital formation but rather a derivative investment. However they may also be used for capital formation. In creating such vehicles, segmentation of the universe of possible investments is commonly used to attempt differentiation of the vehicle for marketing purposes as well as portfolio structure and management knowledge and expertise. 15 2 WO 2005/072357 PCT/US2005/002443 Summary of the Invention The objects of the present invention are to provide for a novel method of selecting investments in an investment portfolio selected from within a broad area of economic activity (such as healthcare) and to provide for (market and management) differentiation of such 5 portfolios from those selected by other means. Current practice for portfolio creation and management includes segmentation or analysis of the space consisting of possible investments according to criteria which define regions of the space and its geometry. For complex economic activities including but not limited to healthcare, energy industries, electronics and communications, the space is commonly organized into sets of planes for 10 presentation and discussion and common terminology refers to horizontal and vertical segmentation within these planes. Since there are often more than three criteria for segmentation it is possible to have multiple sets of planes. Common practice is to define a principal axis or criterion and then group/analyze according to one or more 'dimensions' in the space. 15 The present invention concerns a novel method of definition of a principal axis or regional boundary within such space for analysis, selection and management purposes. Specifically, in the field of healthcare, it is proposed to organize investment portfolios according to diseases. This differs in several significant aspects from conventional methods of segmentation such as horizontal healthcare delivery portfolios (e.g. hospital industry) or 20 vertical portfolios such as 'the surgical supply chain'. Specific diseases, defined as a 'vertical' for the purposes of portfolio selection have novel and unexpected utility and confer properties on the portfolio in an unanticipated manner. In fields other than healthcare we propose other methods for creating novel classifications with similar general attributes as will be discussed later. The following examples should be seen as illustrative rather than limiting. 3 WO 2005/072357 PCT/US2005/002443 Diseases as an 'axis' for defining portfolio selection have some relevant properties including but not limited to: " They can be viewed as a social and economic problem in the context of healthcare and its delivery, however they can also be viewed as a personal issue. When seen from the latter 5 point of view 'relevance' or motivation (value) is a steeply decreasing function of distance from the afflicted observer * They create clusters of research and development based on academic focus and scientific progress * They provide specific insight into and measurement of companies' development 10 programs and define markets as to size and competition The present invention can be implemented in conjunction with any portfolio selection, management and trading system and is not restricted to public securities or any type of portfolio management or trading structure. It may be implemented via direct or indirect investment methods and can allow user participation via implementations which provide for 15 client participation in purchase decisions. 4 WO 2005/072357 PCT/US2005/002443 Brief Description of the Drawings A preferred embodiment of the invention will be described in detail with reference to the drawings, in which: Fig. 1 shows a flow chart for forming an investment vehicle according to the preferred 5 embodiment; and Fig. 2 shows a schematic diagram of a system for implementing the preferred embodiment. 5 WO 2005/072357 PCT/US2005/002443 Detailed Description of the Preferred Embodiment A preferred embodiment of the present invention will be set forth in detail with reference to the drawings, in which like reference numerals refer to like elements throughout. Fig. 1 shows a flow chart of the method steps used in forming an investment vehicle 5 according to the preferred embodiment. In step 102, companies are selected by involvement in specific categories which define sub-regions in the economic area of interest. For example, in the area of health care, categories are defined by specific disease applications. In other fields of endeavor, they could be selected by involvement in hydrogen fuel-cell research or the like. In step 104, the selection of companies is restricted to additional criteria such as 10 stage of economic development, e.g., those companies which have not yet brought products to the relevant markets. Steps 102 and 104 can be performed through a database search on a server. In step 106, the selected set is organized according to the requirements of an investment vehicle such as a mutual fund, a private portfolio, or a portfolio that is the basis of a derivative such as a future. The liquidity of such an investment vehicle can be limited but 15 need not be constrained to a time frame comparable to the development time of the products. In step 108, the investment vehicle is managed or made available to a trading system. By way of specific example and without in any way intending to limit the generality of the invention or its applications, let us consider 'prostate cancer' as a defining criterion or axis for portfolio selection. For simplicity this axis will be referred to as a 'vertical' hereafter. 20 It should be noted that this is not a biological definition, but rather a patient-relevant disease definition. Using this criterion a portfolio of companies can be selected as per the following example: Abbott Abgenix 25 Advanced Magnetics 6 WO 2005/072357 PCT/US2005/002443 Bayer Bristol Celgene Cell Genesys 5 Cytogen Dendreon Genentech ISIS Medarex 10 Myriad North America Scientific Praecis Varian These companies are all (as of the date of this filing) involved in development or 15 marketing products which satisfy the criterion of 'related to prostate cancer disease'; in some cases diagnostic, in others therapeutic. Obvious but relevant is that the list is time sensitive and not necessarily complete. As a further example of the invention's relevance to portfolio construction and management, by deletion of those companies from the above example which are either not 20 involved in the development of therapeutic drug products directed towards prostate cancer or classified by a separate economic sort as large pharma, the following list is generated: Abgenix Advanced Magnetics Celgene 25 Cell Genesys 7 WO 2005/072357 PCT/US2005/002443 Cytogen Dendreon Genentech Isis 5 Medarex Myriad Praecis This list has significantly different economic characteristics and is an example of the situation of a portfolio which is likely to reflect the economics of product development and 10 scientific progress with respect to the field more directly than a portfolio comprising large companies which, while they may fall within the space as defined by the 'disease' criterion, are more likely to have numerous other value drivers of comparable impact. By way of clarification, a portfolio comprising the companies: Abbott 15 Amgen Bayer Genentech Varian while falling within the region defined by the 'disease' criterion arguably lacks economic 20 weighting or leverage according to this criterion. Portfolio management considerations such as economic leverage, volatility, liquidity etc. will be relevant to the selection and management processes as will the nature of the managed portfolio (private, UIT, ETF, mutual fund, portfolio that is the basis of a derivative such as a future, etc.). 8 WO 2005/072357 PCT/US2005/002443 In fields other than healthcare, there are analogs to 'diseases' which may be used to define novel portfolio selection criteria. Specifically, and without limiting the generality of the invention, it is intended to create 'axes' based on the development of basic technologies and applications within broadly defined fields. It should be noted that an essential and 5 common feature of these selection methods is the existence of fundamental technological change within the field. This results in linked behavior of companies within a selected portfolio and is an important and non-obvious result of the present invention. For simplicity we will refer to this axis as 'Vertical' hereafter. As examples of vertical markets as defined in the present invention, consider prostate 10 cancer or Alzheimer's disease. A specifically focused vehicle for investing according to this selection criterion has not existed until the present invention. Examples of vertical markets within healthcare will be described more fully. Other examples will be given below, and still others will be realized by those skilled in the art who have reviewed the present disclosure. Therefore, the following examples should be seen as 15 illustrative rather than limiting. 1- Companies (in the field of healthcare) can be grouped by specific diseases. Individual companies may be engaged in respect to more than one disease indication. Within that classification, portfolio candidate selection may be carried out by additional sorts according to a number of conventional analytical metrics such as financial condition. 20 Grouping by disease as a method of candidate selection is novel and results in a number of unexpected and useful properties of a portfolio selected in that manner. Advantages include market differentiation, portfolio size restriction and the ability to create portfolio management tools that are specific to value drivers related to underlying technology development. 2- If a portfolio of companies selected in the manner described in '1' is created with 25 the further restriction that only companies which have not yet brought products to the specific 9 WO 2005/072357 PCT/US2005/002443 designated markets are included, a development-stage portfolio can be created. A portfolio structured in this manner can reflect scientific progress and the economic consequences of technology development. Multiple portfolios of this type can be created both within a given disease category and across several different disease categories. For example, within a given 5 disease category, such portfolios may be selected according to stage of development or other criteria which allow segmentation and management of the category according to other investment criteria. The definition of 'disease' may be broadened or narrowed according to related selection criteria. Within the practice of the invention the n-space from which (these) portfolios are selected, and the boundaries and shape of a region may be varied significantly. 10 An important emergent property of such portfolios relates to their relevance to the personal interests of individual investors and consequently to the market characteristics of such portfolios. That property is unexpected and novel for an investment vehicle. The present invention is not limited to healthcare. It can be used to create investment vehicles in any area of economic activity where it is possible to define spatial regions which 15 have a common 'investor-observable' definition which determines multi-factorial boundary criteria and where there is a related (high) rate of change which results from the definition. For example, within the 'energy production' field, segmentation by technology could yield portfolios organized by (for example) solar conversion, fuel cells and turbine generators; segmentation by source could yield solar, petrochemical, hydrogen and solids. However an 20 example of an 'investor-observable' definition as above could be 'portable power generation' - this creates a region within the general space of 'energy production' in the manner described. Examples from other areas of economic activity can readily be generated. The invention can be generalized to any form of portfolio such as private equity, mutual fund, unit investment trust (UIT) or exchange traded fund (ETF) which may be specific in respect to 25 other criteria such as the type of security or management structure permitted. 10 WO 2005/072357 PCT/US2005/002443 The invention also permits selecting and managing an investment portfolio in a specific (the healthcare) sector comprising: selection of companies according to their involvement in development of products for specific applications (diseases), which selection shall be a dominant but not sole criterion for inclusion in a 'sectoral portfolio', and of limiting 5 the liquidity of such a portfolio to a timeframe comparable to the development time of such products. By such limitation, it is possible to modify trading and management characteristics of a portfolio to match, more closely, development of economic values which are related to the portfolio selection criteria. The invention permits creating investment portfolios which have a specific relevance 10 for individual investors based on their personal (health) interests. A suitable trading system is shown in the schematic diagram of Fig. 2, although any other suitable trading system can be used instead of, or in addition to, the system 200 of Fig. 2. In the system 200, trading information concerning the investment vehicles is loaded onto a server 202, which is accessible over the Internet 204 by traders using personal computers 206 15 from their homes or offices, or any other suitable Internet access devices, e.g., third generation cellular telephones. In particular, the system 200 of Fig. 2 has utility in carrying out steps 102 and 104 of Fig. 1, in which case the server 202 can be configured to implement the required database searching capability. The specifics of the technological implementation of such a system 200 are known in the art and will therefore not be described in detail here. 20 While a preferred embodiment of the present invention has been described above in detail, those skilled in the art who have reviewed the present disclosure will readily appreciate that other embodiments can be realized within the scope of the invention. The trading system can use a proprietary network or stand-alone system. Therefore, the present invention should be construed as limited only by the appended claims. 25 11 WO 2005/072357 PCT/US2005/002443 12

Claims (14)

1. A method for forming an investment vehicle, the method comprising: (a) selecting entities for investment from a field of economic activity according to extrinsic criteria which define a subset such that the entities form a 'vertical' subgroup; 5 (b) restricting the vertical market of step (a) in accordance with at least one investor observable additional criterion to form a selected set of the entities; (c) organizing the selected set into an investment vehicle; and (d) managing or making the investment vehicle available on a trading system.

2. The method of claim 1, applied to healthcare wherein the vertical subgroup is 10 defined by diseases.

3. The method of claim 1, applied to any economic field where the subset is defined by user attributes of a non-economic nature.

4. The method of claim 1, applied to any economic field where the subset is defined on the basis of technological development and in particular where a subset can be defined by 15 specific technological differentiation,

5. The method of claim 1, applied to any economic field including healthcare where the entities are sub-classified according to pre-market product development status.

6. The method of claim 5, wherein the entities are subclassified in relation to regulated industries in which product development progress may be assessed according to established 20 criteria such as regulatory approval processes.

7. The method of claim 1, wherein liquidity for the investment vehicle is adjusted to reflect expected time for the entities to bring products to the vertical market.

8. The method of claim 2, wherein liquidity for the investment vehicle is adjusted to reflect expected time for the entities to bring products to the vertical market. 13 WO 2005/072357 PCT/US2005/002443

9. The method of claim 3, wherein liquidity for the investment vehicle is adjusted to reflect expected time for the entities to bring products to the vertical market.

10. The method of claim 4, wherein liquidity for the investment vehicle is adjusted to reflect expected time for the entities to bring products to the vertical market. 5

11. The method of claim 5, wherein liquidity for the investment vehicle is adjusted to reflect expected time for the entities to bring products to the vertical market.

12. The method of claim 6, wherein liquidity for the investment vehicle is adjusted to reflect expected time for the entities to bring products to the vertical market.

13. The method of claim 1, wherein the investment vehicle is an exchange traded 10 fund.

14. The method of claim 1, wherein the investment vehicle is a unit investment trust. 14