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Healthcare’s revival: What investors need to know

29 August 2024

Some areas of the healthcare market look ripe for reappraisal.

By Darius McDermott,

Chelsea Financial Services

In mid-August, Mpox was declared a global public health emergency for the second time in two years by the World Health Organization. The virus is similar to smallpox, and had started out in Africa, but cases have been reported in Sweden and it is ‘highly likely’ to spread to other parts of Europe, according to the European Centre for Disease Prevention and Control (ECDC).

The prospect of a new virus spreading across Europe has seen the share prices for vaccine makers rise. Bavarian Nordic, one of the few companies with an approved Mpox vaccine, has seen its valuation jump following the outbreak.

It has also boosted some of the medical tools suppliers and has helped build on momentum in the healthcare sector following rising Covid cases in Asia.

However, until recently, the healthcare sector was having a dull period. It lags the MSCI World index over one year, with the MSCI Healthcare index showing growth of just 13.9% versus 18.9% for the broader index. Momentum has waned for some of the key trends in healthcare, notably for the GLP-1 obesity treatments. After a strong run last year, companies such as Novo Nordisk have seen their share price stagnate over the past few months.

Nevertheless, the long-term trends remain solid. The United Nations estimates that the global population over 60 will more than double to around 2.1 billion by 2050. This has significant implications for healthcare spending, a phenomenon already clear in the UK from the ever-rising cost of the NHS. In the US, healthcare spending for those aged 65 and over is around 2.5x higher than it is for working-age adults.

Less widely discussed is the astonishing innovation in healthcare. The GLP-1 treatments for obesity are just one example. There has been phenomenal progress in vaccines, in genomics, and all the way down the medical supply chain. These are helping solve some of the most intractable health problems faced by humanity.

In 2023, the US Food and Drug Administration (FDA) approved 55 new therapies, the second-highest approval rate in 30 years, according to Gareth Powell, head of healthcare at Polar Capital.

“Our improving understanding of human biology and the drivers of disease are allowing the biopharmaceutical industry to produce novel, targeted strategies to address significant unmet medical needs. We are seeing this innovation across subsectors from infectious disease, neurological conditions and opioid abuse to cardiovascular disorders and respiratory diseases,” he said.

Healthcare is also likely to be a key beneficiary of artificial intelligence (AI) and machine learning, which is already being employed to improve diagnosis and patient outcomes. Powell said researchers at the Mayo Clinic are investigating how AI can be used to improve polyp detection, vital for the early diagnosis of colorectal cancer. At the moment, as many as half of post-colonoscopy colon cancer cases arise from lesions missed at patients’ previous colonoscopies. The AI system scans the colonoscopy video feed finding polyps that might otherwise be overlooked.

Investors have a range of options when looking at healthcare. There are the large pharmaceutical giants, which tend to be defensive and pay high dividends. These will often be a significant part of UK equity income funds.

The IFSL Evenlode Global Income fund, for example, has a 20.1% allocation to healthcare, significantly higher than the MSCI World weighting of 11.9%. It holds companies such as Swiss biotechnology group Roche, medical device company Medtronic and diagnostics group Quest Diagnostics.

Healthcare is currently the largest position (32.2%) of the Comgest Growth Europe ex UK fund. It is also 16.1% of the Capital Group New Perspective fund, which holds Novo Nordisk, Eli Lilly and AstraZeneca among its top 10.

The BlackRock Global Unconstrained Equity fund also has a significant position (23.1%) in healthcare, its second largest sector weight after information technology.

Then there are dedicated healthcare funds such as the Polar Capital Global Healthcare Trust, which currently has 25.7% in biotechnology and 21.1% in pharmaceutical companies. It has another 17.6% in equipment companies, plus an exposure to life sciences and even healthcare facilities. In this way, it provides exposure to the full spectrum of healthcare providers.

There are areas of the healthcare market that look ripe for reappraisal. Biotechnology has been particularly hard hit as interest rates have risen and risk appetite has waned among investors. The vogue for AI and technology has potentially crowded out some of the other growth opportunities in financial markets, including innovative healthcare. Against this backdrop, the Mpox outbreak may remind investors why the sector is so important.

Darius McDermott is managing director of FundCalibre and Chelsea Financial Services. The views expressed above should not be taken as investment advice.

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