The healthcare sector stands at an important intersection.
On one hand, our health security is threatened by lifestyle changes and industry hurdles triggered by the pandemic, underfunding and high inflation. Yet, on the other, an abundance of innovation is sparking technological progress and advances in the delivery of healthcare.
Each of these perspectives offers opportunities for discerning investors to identify and capitalise on emerging trends.
Tackling unhealthy lifestyle choices
The world’s ageing population is widely recognised as a growing strain on global healthcare systems. While true, another more avoidable threat to healthcare resources stems from lifestyle choices. Rising rates of obesity are contributing to chronic health issues, undermining progress in life expectancy and reducing quality of life, as well as placing a further strain on healthcare services. According to the IDF Diabetes Atlas, there are already 537 million people living with diabetes today, but this number has been projected to reach 700 million by 20451.
Despite the clear social and financial costs associated with poor human health, many governments are taking insufficient steps to tackle unhealthy lifestyle choices. This failure to act provides an opportunity for healthcare innovation.
One area that has captured media and market attention alike has been the development of anti-obesity drugs that suppress appetites and can help to drive permanent changes in unhealthy eating habits. These glucagon-like peptide-1 (GLP-1) medications offer a range of other benefits beyond weight loss, limiting the number of serious cardiovascular events such as strokes and heart attacks, reducing the incidence of diabetes as well as lowering blood pressure.
While the leading two manufacturers of GLP-1 medications continue to ride high, digging a little deeper suggests their trajectory may be nearing a peak. Data indicates high levels of lost weight being quickly regained; the high price of these drugs is impeding widespread use; and there is a strong pipeline of new drugs in development that could disrupt what has become a duopoly market. Prudent investors may find that this next generation of obesity drugs could offer more attractive returns for investors than the incumbents.
Harnessing healthcare innovation
Healthcare innovation not only opens new markets, but also disrupts established ones by developing alternative treatment methods, improving patient outcomes and changing how healthcare is delivered.
The declining cost of genome decoding is enabling a better understanding of disease biology as well as improving the accuracy of medical treatments. Cystic Fibrosis (CF) is a chronic, genetic disease that causes a mucus build-up in the respiratory and gastrointestinal systems which, left untreated, can result in premature death. New gene-encoding discoveries have led to the development of medicines to treat the underlying cause of CF and thereby improve lung function and reduce exacerbations; early tests point to significant life expectancy improvements.
Novel drug delivery is transforming cancer treatments. For example, by developing and commercialising T cell reception (TCR) therapy, biotechnology has engineered a solution to unlock intracellular cancer targets and harness the body’s immune system to kill cancer cells.
Robotic technologies for minimally invasive surgery are enabling the standardisation of surgical outcomes across a diverse physician base, while offering the potential for improved long-term outcomes through the utilisation of artificial intelligence to analyse data. Within the field of spinal surgery, traditional practices have the potential for significant inter-surgeon variability in outcomes and can damage adjacent nerves. However, digital techniques enable high quality, low radiation full body pre-operative imaging, real-time perioperative nerve monitoring and robotic-guided implant placement, as well as post-operative imaging to evaluate resulting alignment.
In the aftermath of the pandemic, medical procedural volumes have remained constrained thanks to staff shortages, funding shortfalls and an abundance of administration. However, the adoption of greater digitisation has the potential to rewire healthcare infrastructure for the better. Technology can streamline administrative processes, recommend treatment options and predict clinical outcomes, and analyse vast quantities of data to produce more consistent results and reduce the cost of care.
A more benign interest rate backdrop
While long-term structural themes and the providers – and beneficiaries – of healthcare innovation present strong, growth drivers for healthcare investors, the macro environment has generated headwinds in recent years.
Interest rates matter for the sector, particularly its most innovative areas – such as small- and mid-cap biotech and med-tech companies – which are particularly sensitive to interest rates as this can hinder access to capital. Now that central banks worldwide have started to ease monetary policy, a more positive market environment should emerge for the sector. For example, if rates drop in a soft-landing scenario – which is currently predicted by most economic forecasters – innovative healthcare sectors could excel. Yet, even in an economic downturn, the industry’s defensive nature – reflecting the inelasticity of demand for healthcare products and services – could help it outperform the broader market. That said, the risk of stagflation, from persistent inflation or unexpected events, remains a threat. Investors must consider these inflation and interest rate dynamics to make the most of healthcare’s potential for strong returns.
Looking ahead, further periods of macro dominance are to be expected, but its impact seems to be lessening. Conversely, idiosyncratic factors – such as company fundamentals and the changing political landscape – are starting to have more influence on market movement. Despite this uncertain backdrop, sector valuations remain attractive relative to the wider market.
Securing better health outcomes
The healthcare industry may be at a crossroads, but the rapid adoption of new innovations has the potential to secure better health outcomes globally.
At BNP Paribas Asset Management, we see investor interest in healthcare innovation as an area of significant opportunity. Our experienced team strives to identify the healthcare companies driving or benefiting from this innovation and those that are addressing clinically unmet medical needs, while also trading at attractive valuations.
In a changing world, there are going to be winners and losers. By combining multiple perspectives, our healthcare innovators strategy aims to find the companies delivering transformative solutions while also capturing long-term, sustainable returns for our clients.
