Healthcare is well positioned to be the megatrend of the 2020s because of demographic tailwinds, rising healthcare spending, sound earnings, and breakthrough innovation. That offers a wide range of investment opportunities, Mark Denham writes in his essay for finews.first.
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As the population ages, chronic diseases grow in prevalence, and medicine advances, healthcare companies are situated at the heart of a number of major structural changes impacting society. Against this backdrop, the sector provides an attractive pool of long-term investments, with many companies delivering solid earnings and high-profit margins.
With artificial intelligence (AI) set to provide support for doctors and researchers to make more data-driven decisions, the sector’s growth prospects remain compelling.
«Biotech companies tend to offer a high-growth profile, but most of them are small and early stage»
The healthcare sector is made up of many different industries – from pharmaceuticals and devices to health insurers and hospitals – and each has different dynamics. Not only do these various subsectors offer a wide range of investment opportunities they can also act as an interesting portfolio construction tool, especially during economic downturns.
People continue to require medical care regardless of the economic climate, which can make healthcare investments less susceptible to market volatility compared to other industries. In addition, healthcare naturally contributes to improving living standards which meet the growing demand from investors for socially responsible stocks.
Beyond the well-known pharmaceuticals segment – which accounts for 40 percent of the MSCI Healthcare sector – and is generally seen as defensive by investors, there is the biotech segment that has a very different profile. Biotech companies tend to offer a high-growth profile, but most of them are small and early stage meaning that they could be loss operating for years, and even more risks due to the potential that some products under development may never make it to market. In the coming months, the segment should benefit from both resilient growth in the US and rate cuts that could revive sector interest and M&A activity.
«One theme dominating the healthcare discourse is obesity treatment»
Other subsectors offer a steady and secular growth profile, at attractive valuations such as life science tools. The sector has suffered from consumable inventory destocking after many end-customers overordered during the pandemic. We are getting to the end of this process and concerns are priced in. Therefore, the question is not about whether there will be a recovery, but rather when the recovery will occur.
One theme dominating the healthcare discourse is obesity treatment. With over one in eight adults worldwide being overweight and almost half of Americans projected to be obese by 2030, healthcare spending on related conditions is expected to increase.
The market for GLP1 drugs that have proven highly effective in treating obesity is estimated to reach $100bn in peak sales by the early 2030s. The market share should be split relatively equally between Novo Nordisk and Eli Lilly, the two main companies behind these drugs. Wegovy (Novo Nordisk) or Zepbound (Eli Lilly) would result in a net saving (hospital costs, etc.) of around 7,000 British pounds ($8,760) per patient, according to a recent report by the UK NHS.
«Healthcare can represent a genuine source of alpha for investors»
However, the challenge is to convince insurers and governments across the world to cover the cost of these drugs, which are often out of reach for most people. To address this, weight loss drugs need to offer additional health benefits. For instance, during late-stage trial preliminary results, Novo Nordisk's Wegovy drug was able to show a 20 percent reduction in cardiovascular events, i.e. heart attacks/strokes, for people treated with weight loss drugs vs. placebo.
Despite the past two years of strong performance in the obesity theme, we believe that the two leaders will continue to thrive. Analysts' forecasts have not fully accounted for the ongoing momentum in diabetes prescriptions and the significant increase in the supply of drugs for obesity, which met the growing demand in 2024 and beyond.
With both long-term structural changes and short-term innovation providing powerful tailwinds for the sector it is clear healthcare can represent a genuine source of alpha for investors. And, with the sector’s breadth, idiosyncrasies, and multiple performance drivers, it provides fertile ground for stock pickers from both fundamental and portfolio diversification perspectives.
Mark Denham is the Head of Equities and the Manager of the Carmignac Portfolio Grandchildren.
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