Five reasons to invest in healthcare and biotechnology
Updated: Jul 1, 2021
Healthcare and biotechnology investment looks set to deliver better than average returns for the foreseeable future. The sector is supported by several powerful trends, which we'll look at below.
Investing in companies that positively impact human lives is a worthwhile pursuit. You might also find it intriguing to learn about new developments in science and healthcare technologies.
The financial rewards can be spectacular in biotechnology, and sometimes it only takes one big winner in your portfolio to generate monster returns. However, many investors think that making informed stock choices needs a high level of expertise, which often leaves investment decision making to healthcare specialists. As a result, certain small and mid-cap healthcare stocks have tiny investor interest, leaving opportunities for those prepared to take a closer look.
We've seen technology stocks dominating investor focus, and it's not hard to understand why. But many long-term themes are already priced in, and it seems a bit late to be loading up today. The buy case for Amazon is hardly a secret, and investors have already valued Tesla higher than the next five biggest global carmakers added together. We reckon that many healthcare and biotechnology stocks have an equally bright future but are not valued accordingly - this is particularly notable in Europe.
Let's consider the five main themes that will drive the healthcare sector's above-average investment returns for the generation. All the following factors will ensure the need for innovative drug development and bigger, better, more efficient healthcare systems worldwide.
1. Ageing population
The World Health Organization (WHO) estimates that by 2050 the number of people aged 60 or older will more than double to 2 billion. Over 400 million will be 80 or above. Older generations will lead population growth as we see fewer births, better medicines, and reduced infection rates. The global fertility rate (average number of children per woman) has halved since 1970 to 2.5, and today is below 2 in most developed economies.
The Young and Old as a Percentage of Global Population
Source: United Nations - World Population Prospects
Unsurprisingly, the elderly need more drugs than the young. The old are more likely to suffer from often incurable illnesses such as diabetes, arthritis, dementia or cancer. Most drugs taken for these chronic disorders are taken for years or life, bringing a vast total cost. Merck says that almost 90% of older adults regularly take at least one prescription drug. Nursing home residents are prescribed an average of 7 to 8 different medicines to take regularly. As global populations age, spending on care and drugs will inevitably increase.
Approximately 85% of global GDP is generated in cities, and 54% of the global population live in urban areas. People follow the money, so economic growth has driven rapid urbanisation. Pre COVID-19, the UN believes that 1.5m people were added to the urban population every week, with 90% coming from African and Asian countries. While cities provide obvious attractions, they also bring health problems.
An urban lifestyle promotes stress, alcohol and tobacco use, lung illnesses from pollution, and cardiovascular problems from a sedentary lifestyle. Cancer and heart disease are now the leading cause of death in India’s cities. In many emerging markets, poor waste management or lack of access to freshwater results in a rise in infection rates.
Urbanisation is likely to continue, particularly in fast-growing economies. As a result, there will be more demand for drugs to treat chronic conditions, and we'll need more effective antibiotics to treat infections.
Our diets change with rising incomes and urbanisation - we tend to eat more animal-sourced products, fat, sugar, and processed food. Obesity cases have tripled worldwide since 1975 as diet changes have combined with more sedentary lifestyles. Almost 40% of the world’s adult population is classified as overweight (WHO), and 13% is obese. Obesity increases the prevalence of chronic conditions such as diabetes, heart disease, osteoarthritis, and certain cancers. According to a Lancet report, the cost associated with obesity is $2bn per annum through direct healthcare bills and loss of economic productivity. These costs will rise as emerging economies develop.
4. Provider shortages
COVID-19 has highlighted significant weakness in healthcare systems worldwide and is likely to accelerate change. But resources are scarce.
There are an estimated 27.2 million healthcare workers globally, and, pre-COVID-19, the Global Health Workforce Alliance predicted a deficit of 12.9 million workers by 2035. Most developed economies are heavily dependent on immigrants to satisfy demand.
The Association of American Medical Colleges estimated, pre-COVID-19, that there will be a shortage of as many as 139000 US physicians by 2033, nearly 20% less than required to match demand. Today, more than 50% of US physicians are over 55 years old, with many approaching their retirement. Ageing doctors, plus an ageing population, will put increasing pressure on the healthcare system.
Physician services need to be provided more efficiently. To ease shortages, there'll be increased healthcare spending on early detection, new pharmaceuticals, telemedicine and other technologies to reduce the burden on a swamped workforce.
5. Emerging economies
The global healthcare sector continues to grow faster than GDP. According to WHO, between 2000 and 2018, health spending grew by around 3.8% versus global GDP growth of 3%.
Richer countries account for over 80% of healthcare spending despite only representing 16% of the population. The United States alone accounted for 42% of global expenditure.
As a group, low-income countries spent only $35 per head, compared to over $5000 in high-income areas. Contrast India at only $78 per person in 2018, against $10623 in the US (World Bank). Thankfully the balance is shifting as lower and middle-income counties increase their share of spend with governments reforming their healthcare systems.
Healthcare investors have a strong tailwind. The five drivers above mean healthcare spending will continue to grow faster than global GDP. As governments face larger bills, companies that can provide products and services that reduce costs will be in higher demand. In addition, we're likely to see an increasingly supportive regulatory environment as governments encourage innovation and make it faster and cheaper to develop new treatments and technologies. Look at what's happening in the US with new Alzheimer's medicines as an example.
On top of this, we are in the middle of a healthcare revolution. Technology has led to significant advances in drug discovery, such as the increasing use of genomics and gene editing. Artificial intelligence allows data to be processed more efficiently and enables a better understanding of disease and the development of more effective treatments. Robotics improve accuracy and diagnosis, enhance human abilities, provide auxiliary services, and relieve the pressure on scarce human resources.
We need to be looking for the following types of investment:
Successful drug developers bringing medicines that save lives and keep people out of expensive hospital beds or care homes.
Medical device companies producing products that improve lifestyle, give patients treatment options and cater to an ageing population.
Diagnostics companies that reduce healthcare costs by identifying diseases earlier and can help select more appropriate therapies.
Personalised medicine and rare disease drug developers introducing targeted, more effective treatments using genetic profiling and diagnostic testing.
Outsourcing providers alleviating the burden on healthcare systems by providing specialist services and private care.
HeathTech companies helping to prevent illness, facilitating remote monitoring, improve diagnosis and support home care. Technology will also continue to enhance drug development and provide novel treatment options.
There are numerous examples of these companies listed in European stock markets, and through lack of broad investor awareness and understanding, we think that many still trade below fair value. The opportunities are plentiful for anyone willing to spend a little time learning and investigating, and a portfolio of such stocks is likely to produce outstanding rewards.
Through our blogs and website, we aim to introduce investors to companies that seek to reduce the rising pressure on healthcare systems and offer value as investments. We only write about those we believe in. Although drug development is risky, by careful selection, we'll increase the chance of investment success.
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