As one of the few sectors to offer investors protection in the first half of 2022, global healthcare is poised to continue playing a leading role in the markets. This may not be surprising as demand in this sector continues to rise regardless of economic cycles. In fact, the sector has outpaced the global equity market by 15% or more in each of the last eight downturns. .jpg)
Healthcare has been a compelling investment option since the Covid-19 pandemic began for a number of reasons. First there were biopharma companies developing vaccines and treatments for Covid. Now there are other companies that are benefiting from their defensive nature at a time of continued market uncertainty. There are various reasons why we might be entering a golden age of healthcare, which will undoubtedly have an impact on investors.
1. Golden age of drug discovery
We are in the early stages of innovation‘s third major wave in biotech as well as drug discovery. In the first wave long-established chemical companies discovered that they could use their substances to treat diseases. The second wave was marked by the emergence of protein-based therapeutics. These were more targeted and used the immune system to treat disease.
The third wave can be described as the genetic age of medicine. We have the insights from genetic sequencing in recent years and a wealth of data that we can now process quickly, as well as new therapeutic interventions and technologies that can intervene in the disease process in a more targeted way. This could, for example, tackle major diseases linked to obesity, cardiovascular disease, diabetes and kidney failure.
2. Genetic medicine leads to faster breakthroughs
Investment in the biotech and pharmaceutical industries has driven innovation that has led to the creation of intellectual property and knowledge. The scientific community is likely to build on this for years to come. One important advancement is the development of technologies that allow us to intervene in disease pathways at the genetic sequence or 'blueprint' level, which is further upstream than many conventional drugs.
An effective example can be seen in the vaccines against the coronavirus. Scientists would have sequenced the virus within days or weeks of its identification and then translated that sequence into different vaccines and mRNA. This is an example of how a drug can be developed in an extremely short period of time through the targeted genetic manipulation of a pathogen as opposed to the previous method of identifying therapies through extensive experimentation.
3. Better results and lower costs
The wave of innovation is not only limited to drug development, but extends to the service side of healthcare as well. Examples are companies like UnitedHealth Group and Humana but also emerging firms like Agilon, which rely on models where doctors are rewarded for better health outcomes for patients so they don’t have to go to the hospital. This lifts the GP from the bottom rung of the healthcare system to the top. These models as an important step towards what is often called the holy grail in healthcare: better health outcomes, higher patient satisfaction, higher physician satisfaction and lower per capita costs.
4. Financing own growth
The rapid acceleration of innovation could offer opportunities for long-term investment. Many large pharmaceutical companies are well capitalised and have a lot of cash on their balance sheets, which gives them the opportunity to fund their own growth through acquisitions and other strategies. At a time when interest rates are rising and the cost of capital is increasing it is more important than ever to have cash on the balance sheet.
If an innovative product or service is identified, this has the potential to drive an investment thesis for years. This could lead to real profits and cash flows. Several healthcare companies have the potential to be at the forefront of the next bull market, and it will be exciting to see how this plays out in the medium and long term.
Christophe Braun is investment director at Capital Group. The views expressed above should not be taken as investment advice.