Investing in health: it’s not all about Covid

Stacks of patient files, X-ray envelopes, blood count tables and everything in triplicate. Add in stressed-out nurses who could not read prescriptions and doctor's letters that were often handwritten.^[1] When Barack Obama became US president in 2009, he used the paper-heavy hospital administration as an opportunity to call for massive investment in modern infrastructure for the healthcare sector.

Some eleven years and a critical pandemic later, investors are even more focused on the healthcare sector - this time worldwide and with a significantly expanded spectrum of companies. It is no longer just about modern digital hospital organisation. Investors are now also looking at new vaccines, drugs and innovative treatments, such as gene therapies and personalised medicine.

"Many investors recognised the opportunities in the healthcare sector even before the coronavirus crisis," says Sergei Shelesnjak, portfolio manager and analyst for pharmaceuticals and biotech at DWS. "They are going much deeper into the sector. Many companies with enormous innovative power are currently active there.“

Better than the overall market

Over the past decade, healthcare shares have made considerable gains. The next 40 years also look promising.

But that does not necessarily mean that there is no more to come. A study by the Organisation for Economic Co-operation and Development (OECD) predicts that the global health sector could grow at an above-average rate over the next 40 years. The authors believe that the share of health spending in the gross domestic product of OECD countries could rise to about 9.5 % by 2060. That would equate to a quadrupling of the volume of the health care market in those countries since 2010.^[2]

Hope for a Covid 19 vaccine lies with the biotech sector

When it comes to developing a Covid 19 vaccine quickly, people‘s hopes are currently mainly pinned on the pharmaceutical and biotech sector. The industry is currently experiencing very high inflows of funds from investors. Expected margins from sales to government agencies are likely to be on the low side for humanitarian reasons, but the expected volume of the vaccine is huge. The aim is after all to vaccinate billions of people around the globe.

Furthermore, the life sciences industry has made repeated quantum leaps with technology in recent years - for example in the development of new cancer therapies. In the coming years, an increasing number of patients with chronic age or lifestyle-related diseases is expected to drive demand further – and thus innovation.

"However, not all biotech companies will thrive equally," says Shelesnjak. "That is why it is worth investors‘ while to examine stocks closely before selecting them. Potential drugs may work in theory and in pre-clinical studies but very often fail in clinical trials on humans." The truth is that on average only one in every 10,000 potential drugs screened in preliminary pre-clinical trials makes it to market. And the figure is one in five for drugs that enter the preliminary clinical phase. For some diseases - such as depression - the failure rate is much higher. For example, no drug for Alzheimer has yet made it to market. "If a product fails at a biotech company, that can be tantamount to the company failing," explains Shelesnjak. Even the launch of a significantly better product can cause a complete collapse in sales for a drug that is already on the market. "It is therefore essential to understand the drugs in detail and to know what other companies in a particular therapeutic area have in the pipeline.“

Long-term performance

_{Past performance, [actual or simulated], is not a reliable indication of future performance. Sources: Bloomberg L.P., DWS International GmbH, as of 31/08/2020.}