Investing in the golden age of healthcare innovation

The World Health Organization (WHO) celebrates the day it was founded each year on the 7th April. It uses ‘World Health Day’ to shine a light on a health topic of global importance. Over the years, that has included maternal health, climate change, diabetes and depression. This year, its focus is broader. Labelled ‘my health, my right’, it looks at health as a human right and what might be done to achieve universal health standards across the world.

‘My health, my right’ champions the right of everyone across the world to have access to quality health services, education, and information, as well as safe drinking water, clean air, good nutrition, quality housing, decent working and environmental conditions. It is a blueprint for governments, policymakers, corporations and citizens to create better health across the world.

This should be an important driver for companies on the right side of this change. It comes at an exciting time for the health sector generally: shifting demographics are creating more demand for healthcare, and there is also significant innovation happening across the sector, notably in areas such as oncology, vaccines and obesity.

The implications

Companies that provide healthcare products and contribute to better health are likely to have a tailwind of growth. The World Health Organization estimates that an additional US$200–328 billion a year is needed globally to scale up primary healthcare in low- and middle-income countries, while in higher income companies, healthcare costs will need to rise to accommodate the growing health needs of ageing populations.

It also means that governments are likely to crack down on those companies that contribute to poor health outcomes. Healthcare has become a social issue and companies that create health-damaging products – tobacco, sugar, alcohol – are likely to face an ever-higher cost of doing business, either through fines, taxes or a rising cost of capital. It also plays into the energy transition: polluting companies that impact human health are likely to face growing scrutiny.

This shifting environment brings real opportunities and risks for investors. The potential returns available from companies that devise solutions to major healthcare issues has been a notable feature of markets in 2023. The development of transformative GLP-1 drugs to tackle obesity and diabetes by companies such as Novo Nordisk and Eli Lilly has seen their share prices soar over the past 12 months. On the flipside, a greater focus on the impact of obesity has been a major headwind for a number of consumer goods companies.

Professional investor? Read more about anti-obesity drugs impact on the healthcare sector. 

Innovation

The healthcare sector is in a ‘golden age’ of innovation, says Andy Budden, investment director at Capital Group, led by breakthroughs in genomic sequencing. It is building solutions to meet many of the ambitions set out by the WHO.

He says: “The first wave was largely about chemistry − simple compounds created in labs − that could address everyday sicknesses and illnesses. The second wave moved from largely inorganic chemistry to organic chemistry − involving large, organic molecules or protein-based therapies that are much more effective and have fewer side effects. Now we are at the beginning of the third wave − the genetic era − that could be transformative for healthcare.”

This is being seen in areas such as mRNA technology. This has widespread uses, from the treatment of cancer to tackling major viruses such as Covid. There are potential developments in Alzheimer’s treatment, a condition that has previously proved stubbornly resistant to medical innovation.

Equally, there are opportunities beyond the healthcare sector. There is also innovation in areas such as robotics and medical devices. Robots, for example, can improve surgical outcomes, and have greater precision than humans, yet are used in a relatively small number of operations. There is a long pipeline of growth for companies involved in this area. There are also companies that contribute to human health is other ways. The Liontrust Sustainable Future Monthly Income Bond, for example, invests in Veralto, a spin-out company from Danaher, which specialises in providing technology for water testing and treatment*.

Why healthcare today?

This might be a good moment to re-examine the healthcare sector. Andy Budden points out: “2023 was the worst year for healthcare stocks on a relative basis since 1999, underperforming the broad global equity market by 20%**. Excluding Novo Nordisk and Eli Lilly − two large and notable outliers whose successful diabetes/obesity drug franchises drove extraordinary share price returns last year − the sector would have underperformed even more, by 24%**.”

He believes this represents an opportunity to invest at lower valuations in a sector showing long term growth. The sector has been widely overlooked as investors have focused narrowly on the growth available from technology innovation. The US election, where healthcare is a hot issue, may also have played a role in weaker sentiment.

Capital Group believes M&A activity could pick up in 2024 as budgets reset and large-cap biopharma companies seek to reinforce their portfolios. Estimates from Goldman Sachs suggest M&A capacity within healthcare could increase by 34% year on year in 2024**.

Where to invest

In general, picking individual healthcare stocks is fraught with problems. To paraphrase the Verve, the drugs don’t always work, and failures are expensive and time-consuming. This is particularly true at the higher risk end of the market, which may be exposed to a single treatment. In general, investors will be better served by looking for a collective fund with a decent chunk of exposure to healthcare.

Healthcare is major area of focus for the CCLA Better World Global Equity fund. Charlotte Ryland, head of investments at the group, says: “There is an ageing population not just in the West, but in China as well. An ageing population means greater demand for healthcare. However, the innovation we’re seeing within healthcare is also important – whether it’s genetics, or areas such as immunoncology. It’s not just interesting products, but also the whole supply chain.”. They hold medical supply company Thermo Fisher Scientific and clinical research company ICON in their portfolio***.

Healthcare is currently the largest position (32.8%) of the Comgest Growth Europe ex UK fund. It’s also 15.8% of the Capital Group New Perspective fund, holding Novo Nordisk, Eli Lilly and AstraZeneca among its top 10***. The BlackRock Global Unconstrained Equity fund also has a significant position (18.8%) in healthcare***. It is its second largest sector weight after information technology. The Stewart Investors Asia Pacific Sustainability fund also has a significant overweight to healthcare (17.7%) compared to the index (5%)***.

The healthcare sector is poised to help achieve many of the ambitions the WHO sets out on its World Health Day with sufficient will from governments, policymakers and organisations. This should be a win-win for investors – the chance to secure strong returns, but also to improve the world. 

Want even more? Ben James, investment specialist director on Baillie Gifford American, tells us more about the intersection of healthcare and artificial intelligence in the interview below.

*Source: Liontrust Asset Management, 17 January 2024

**Source: Capital Group, 29 February 2024

***Source: fund factsheet, 29 February 2024