Sep 29, 2020 Equities

Investing in health: it’s not all about Covid

Demographic changes should further increase demand for healthcare services in the coming years. This opens up return opportunities for investors.

  • Healthcare stocks easily outperformed the overall market in the past decade.
  • Demographic changes should mean this positive trend continues.
  • According to an OECD study, the industry is expected to enjoy above-average growth until 2060.
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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.“

Healthcare shares can lend a portfolio stability even in difficult economic times.

Health investments look attractive - for several reasons

There are many reasons why investing in healthcare could be attractive for investors. For one thing, there has been a burst of M&A activity in the industry, which always offers attractive opportunities to profit. The sector is also characterised by comparatively low price fluctuations and economic sensitivity. Drugs and new therapies are always needed, even if the economy as a whole is not doing well. Therefore, healthcare shares or funds that invest specifically in the healthcare sector can lend a portfolio stability even in difficult economic times.

Population growth and ageing societies in wealthy industrialised countries are likely further to boost demand for healthcare services in future. In addition, there are new and largely unexplored disease patterns that require successful treatment. And the growing number of investors who desire sustainable investments also plays into the hands of many companies in the healthcare sector. It is easy to reconcile many healthcare companies‘ objectives with the sustainable investment objectives of ESG- or SDG- oriented investors.

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.“

It’s a UN sustainable development goal (SDG) to ensure a healthy life for all people of all ages and promote their well-being.

The coronavirus pandemic should also have opened a door - to more e-health.

A sustainable health care system means cost reductions

On the topic of costs, it has long been necessary to reduce costs in the healthcare system to increase doctor, hospital and care facility efficiency. E-health can make a decisive contribution here.

The coronavirus crisis has created a new impulse to digitalise the health sector. Telemedicine, for example, was been shown to work well in practice. "The pandemic has given telemedicine technology a strong boost," says Shelesnjak. "In the USA, there was even government support to push the topic forward."

But the opportunities offered by digitisation are more multi-faceted than that. It is not just about cutting costs and providing an alternative when visiting the doctor in person is not possible. It also opens up new health applications via sensor and app, as well as innovative treatment methods that can improve patients' recovery chances and accelerate their rehabilitation.

Future digital medicine also includes companies in the medical robotics and technology field. Robotic surgery, for example, can be used to perform surgical procedures that minimise tissue damage. This ensures a faster healing process and shortens hospital stays. Further examples include systems for blood sugar monitoring and early cancer diagnosis, as well as digital X-ray systems.

Synergy effects are high in the health sector

Within the health sector, individual sub-sectors can also benefit from synergy effects. New players in the technological and bioscientific fields can furnish traditional healthcare providers, such as hospitals, doctors and nursing homes, with new possibilities that have a positive impact on their profitability and progress in treating patients.

Ageing societies and the rising middle class in emerging markets should continue to ensure growing demand for medicines. This in turn should support traditional pharmaceutical businesses, as well as stationary and digital pharmacies.

Long-term performance

Index

08/15 - 08/16

08/16 - 08/17

08/17 - 08/18

08/18 - 08/19

08/19 - 08/20

MSCI World

8.0%

9.5%

16.2%

6.5%

8.1%

MSCI World Health Care

0.1%

4.3%

16.5%

6.5%

13.3%

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.

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1. See for example: https://edition.cnn.com/2009/POLITICS/02/09/obama.conference.transcript/

2. Source: http://www.oecd.org/economy/growth/Health%20FINAL.pdf

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