Healthcare has been an important source of opportunity for our World Stars Global Equity strategy. At the end of 2023 our exposure to the sector was 16%.
The global healthcare market is a substantial part of the global economy. It is valued at approximately US$166 billion and projected to exceed US$283 billion in 2027, while global health spending is forecast to rise by more than 40% over the next two decades according to the US health institute IMHE. Healthcare accounts for around 18% of US GDP alone.
It is a diverse sector, encompassing an array of different businesses ranging from medical services, manufacturing equipment, drugs and facilitating patient care, to name but a few. We are highly selective about the companies we invest in, preferring companies that are in medical diagnostics or equipment, tools, and ethical pharmaceuticals.
We recently contributed to an article published in Forbes magazine entitled “How to invest in healthcare” and were asked to answer several questions that would help inform its readers. We wanted to share Forbes’ questions and our responses with you in full for this month’s investment insight.
Healthcare sector performance
The sector’s performance since 2020 has been significantly impacted by pandemic factors including the closures of hospitals to non-urgent treatment as healthcare systems prioritised Covid patients. Having benefited from Covid testing and treatment revenues during the pandemic there has since been a sharp decline in revenues. Although the underlying growth of our companies remained strong, challenging comparisons (from Covid-related sales) to the prior year led to muted results in 2023.
The medical technology sector has also more recently suffered from indiscriminate selling pressure because of investor fears of a reduction in the total addressable market as a new class of weight-loss drugs, known as GLP-1, entered the healthcare mainstream. Created to treat diabetes these drugs have demonstrated significant metabolic improvements in multiple medical conditions such as cardiovascular disease, sleep apnea, progression in diabetes and kidney disease, to name just some.
We expect the drag from Covid-related revenues to continue to fade as the underlying strength of companies in the sector becomes ever more evident. We believe that as investors digest GLP-1 data, they will become more selective on which companies will benefit from its presence. Whilst the healthcare system is moving towards normality, we believe that the accumulated backlog over the pandemic years is likely to keep demand for some parts of healthcare services elevated.
The case for investing in healthcare
The biggest driver for the demand for healthcare is the ageing population in the developed world and the rise of income in emerging markets. We believe this structural trend of rising demand will continue for many years to come. The number of people aged 60 or older is projected to double, reaching nearly 2 billion by 2050, with most of the increase in developing countries, according to the World Health Organisation. By 2030, The American Hospital Association estimates that more than 60% of the Baby Boomer generation will be managing more than one chronic condition, leading to increased financial demands on healthcare systems. Innovations and better treatments to meet unmet medical needs will drive value-added benefit to both the healthcare system (by saving more lives and lowering the overall cost of care) and the companies that offer them.
Historically, the healthcare sector has been inefficient for several reasons, including its labour intensity and the high degree of regulation of data sharing. There is a significant scope to do better in terms of cost by deploying data, AI and digital solutions across the spectrum, from R&D, sales and marketing and back office to manufacturing, to improve profit margins and profitability.
On the other hand, healthcare expenditure in major developed economies has been rising above GDP. For example, in the US, the Centers for Medicare & Medicaid Services (CMS) projects healthcare expenditure to grow 5.4% pa between 2021 to 2031 and as a share of GDP to increase from around 18% in 2022 to 20% in 2031.
In the UK, where the National Health Service (NHS) provides most of the care, access to innovations is more measured. Prices tend to be significantly lower than those in the US because they are negotiated in bulk at the national level. Healthcare expenditure as a share of GDP, though lower than that of the US, still stood at 11.3% in 2022 (ONS).
Rising costs have put pressure on governments and private payers to seek price concessions through price negotiation, tendering, value-based procurement (VBP), and adoption of the use of generic and biosimilar drugs.