Growing demand for healthcare continues to place the sector under increasing pressure to ensure greater health security and resilience.
Innovation and technology adoption will be pivotal in securing the world’s health. As new treatments and technologies are developed, the healthcare landscape is set for profound change as new markets are created and existing markets are disrupted. For investors, such change will inevitably lead to new and innovative investment opportunities.
Healthcare spending outpacing GDP due to secular reasons
Global health expenditure as a proportion of GDP has been rising for a long time and will continue to do so. Spending on healthcare is forecast to grow continuously between 2024 and 2029 to reach 6.26% of global GDP, up from 6.08% currently and outpacing GDP growth. 1
The growth in healthcare demand can be attributed to several key drivers:
- Demographics: the world’s ageing population is utilising more health services each and every year.
- Lifestyle: rising rates of obesity are driving an increase in associated diseases with downstream medical implications.
- Innovation: the development of new treatments is accelerating with novel therapeutics being developed for previously untreatable conditions, while technological solutions are taking healthcare to the next level.
- Wealth effect: there is a close correlation between GDP per capita and healthcare expenditure, so rising wealth is having a corresponding impact on the demand for healthcare, particularly in emerging markets.
This rise in demand is putting pressure on budgets at the same time as healthcare innovation is disrupting existing markets. From an investment perspective, there will be winners and losers, meaning a fundamental, bottom-up approach is critical to achieving robust returns over the long term.
Biopharmaceutical advances
The biopharmaceutical landscape is being transformed by innovations in DNA sequencing, novel drug delivery technologies and artificial intelligence.
The cost of genetic sequencing has dropped from around USD 100 million per genome 20+ years ago to below USD 1000today.2 This reduction in cost makes it economically viable to perform population-based sequencing analyses to identify mutations which could cause diseases.
Insights from the analysis of genomic data are yielding novel therapeutic targets for previously untreatable or inadequately treated diseases. Advances in drug delivery have led to the ability to insert or edit genes, impact gene expression at the RNA (Ribonucleic acid) level or manipulate the body’s immune system to address cancers or autoimmune diseases. Meanwhile, precision medicine using biomarkers is also being developed and progression in liquid biopsies is changing how cancer is detected and treated.
Advancements in artificial intelligence are also being deployed in health research and development to expedite and optimise chemical design, improve manufacturing development, speed up clinical trial recruitment and augment diagnostics.
Technology meets healthcare
The delivery of healthcare is also being disrupted by technology.
Engineering advances have enabled the miniaturisation and automation of medical procedures. This has resulted in the continued advancement of minimally invasive surgical techniques which improve outcomes and enable patients to leave hospital more quickly. In the treatment of diabetes, miniature insulin pumps are being combined with patch continuous glucose monitors and AI-based algorithms in an on-body closed-loop system (aka an artificial pancreas). This means patients can manage their disease more effectively and with minimal intervention.
In the operating room, advances in robotic surgical technology are being integrated into a software ecosystem that captures all pre-, peri- and post-operative information in order to learn best practices and drive those learnings back to the user base. This data has reduced inter-surgeon variability and is leading to better patient outcomes with less trauma.
The falling cost of 3D printers and new applications for 3D printing technology have the potential to benefit the healthcare industry. Future advances may include 3D printers being used to produce patient-specific organs for transplants, ideally making them less prone to rejection.
Challenge for investors
Such a rapidly evolving sectoral landscape, which is being fuelled by complex innovation, can be challenging for generalist investors. Some of the advances being made may be at the expense of existing treatments and technologies and so decisions need to be made as to how to allocate budgets. Over the long term, investing in this sector requires an in-depth fundamental process and extensive research to find the right opportunities.
Secular trends and innovation should underpin long-term outperformance for the healthcare sector versus the wider equity market, but this advance is unlikely to be a linear journey. 2023 was a particularly tough year for many healthcare stocks, which faced numerous headwinds. The rising interest rates environment presented hurdles for small- and mid-cap biotech and medtech companies; life science tools and contract research organisations were hit by a post-covid inventory winddown and tighter research budgets; managed care stocks were hurt by declining Medicaid enrolment in the US; and large-cap biopharma companies were pressured by looming patent expirations and concerns about consequent price negotiations. A rare bright spot was the excitement surrounding new anti-obesity medications, which saw their manufacturers’ share prices soar. However, this development weighed on the broader medtech market amid concern that these highly effective drugs may impair other markets and companies within the universe, and the obesity trend is not going away.
Many of these headwinds were short-term and, looking ahead, the outlook for the sector appears much brighter: valuations are more attractive and opportunities are plentiful. Yet, as the above complexities illustrate, healthcare remains a difficult sector to navigate.
Taking a thematic approach towards healthcare
The combined forces of the strong demand for healthcare and an abundance of innovation in the healthcare space should present a multitude of opportunities across multiple markets and interconnected sectors.
However, finding the right opportunities during this period of transformation will require in-depth fundamental research, an open mind and the ability to examine challenges and opportunities from multiple perspectives.
At BNP Paribas Asset Management, our Healthcare Innovators strategy combines a thematic approach with a sustainability framework that enables our experienced equities team to handpick the most compelling stocks from a sustainability and thematic perspective, with the aim of delivering long-term outperformance.
[1] https://www.statista.com/forecasts/1141705/health-expenditure-gdp-share-forecast-in-the-world
[2] https://viewpoint.bnpparibas-am.com/thematic-investing-innovation-disruption-and-sustainability/
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