Shares
Beneath the sector surface: wonderdrugs, pandemics and explosive growth make healthcare the most dynamic sector
According to the World Bank, approximately £1 in every £10[1] spent globally goes on healthcare. Analysts expect that figure to grow in line with global life expectancy improvements. In this article, we’ll be exploring the healthcare sector, the emerging opportunities, external risks and how biotech’s pace of innovation is a double-edged sword.
Historically, the sector has proven capable of consistently outperforming the wider market while offering some of the most impressive innovation-driven growth opportunities available. Recent advances in biotechnology and delivery systems point to an exciting but unpredictable future.
Read on to discover why:
- Increasing life expectancy presents exciting opportunities for growth
- Big Pharma is the main character, but the supporting cast deserve your attention too
- Heavy regulation can actually drive competition
- Healthcare shares some important similarities with the utilities sector
- Personalised medicine, disease management and the ageing global population present potentially big opportunities
High failure rates, volatility and game-changing opportunities
Healthcare is one of the most heavily regulated sectors in the world. The average time to market for a new drug is about 12 years. And for every drug that makes it to a patient, nine don’t make it past the phase one clinical trial.
So where’s the upside, exactly?
Firstly, savvy investors will be diversified across biotech, pharma, manufacturing and delivery systems. Backing a single pharmaceutical to win is not the path to growth.
Secondly, every now and then that one pharma stock will win. And when they do, they can win big.
If you’d bought stock in Moderna at IPO in December 2018, you’d have paid $18.60 per share[2]. By September 2021 your investment would have increased by 2,316% to $449.38 per share[3]. A $10,000 initial investment would have been worth $231,600.
This isn’t to say we need to rely on global pandemics to drive growth in pharma stocks, but it does illustrate the immense potential upside when a pharma product breaks through approval and delivery barriers.
A less extreme example of this is Biogen. Established as a consistently performing stock already, share value grew 48%, from $263 to £388 per share[4] between April and June 2021 after the Food and Drug Administration (FDA) granted accelerated approval[5] for its controversial Alzheimer's drug. Had you held your position though, that growth would have been mostly lost when the drug was discontinued in 2024[5].
It’s not all about stratospheric short-term growth. If you’d bought into the then relatively obscure Danish biotech firm Novo Nordisk in 2000, you’d now be looking at a stock worth 4,690% more[6] than when you bought it. The vast majority of that growth has been driven by the development of Semaglutide, better known as Ozempic.
Savvy investors examining R&D pipelines now will be attracted to the companies with new products approaching regulatory approval, who already have products in the market.
And as a savvy investor, your job is to find a way to capture growth without trying to be a wonder drug spotter. Exchange-traded funds (ETFs) can be a useful way of doing this.
Learn more about ETFs and other ways to trade without owning stock in our guide to commodities trading.
Healthcare isn’t just Big Pharma
Within healthcare are a handful of subsectors with their own dynamics and characteristics. Pharmaceuticals obviously play a major part, but without the following subsectors, pharma would not be a driver of value:
- Equipment
- Diagnostic systems
- Delivery systems
- Care provision, hospitals and nursing homes
- Labs and R&D
- Legal
As a sector, healthcare shares some important characteristics with utilities. It’s historically a defensive investment that overlaps with and is influenced by dynamics in other industries upon which it relies to drive value. For example, without the tech sector and the insurance sector, the healthcare sector is limited in its capacity to deliver and grow.
If Big Pharma is the main character, drug delivery, medical equipment and insurance are the supporting cast.
From an investment point of view, the supporting cast of subsectors tends to offer less volatility due to the lower regulatory and licensing burden. It’s simply less complicated to develop and test drug delivery systems or build a new hospital wing than it is to develop a new drug.
Politics, cybercrime and why regulation can drive growth
The healthcare sector is exposed to a host of strong and powerful external influences. Political reform and health policy interventions can make it almost impossible to estimate the performance of some stocks, as demand and the ability to meet that demand are often not enough to predict success. And due to its reliance on digital tech and personal data, healthcare is highly exposed to the growing risk of cybercrime.
Healthcare products cost a lot of money to develop and a long time to get to market. It is not impossible for a company on the verge of releasing a game-changing drug to simply run out of cash. And stocks that appear safe on the surface can collapse almost overnight.
In 2023, the price of Acelyrin crashed by almost 60% just four months after the firm’s IPO when its lead prospect for inflammatory disease failed in a clinical trial[7].
There’s one unique and major benefit of having a highly regulated sector subject to intense scientific scrutiny; however, once one prospect gains regulatory approval, competition to serve other areas with similar pharmaceuticals intensifies. This creates a cyclical system of innovation and production which lowers the cost of R&D and increases investment opportunities.
Personalised medicine and disease management
Genomic sequencing has the potential to completely alter how healthcare is developed and delivered, making previously incurable diseases treatable, if not curable. This ‘personalised medicine’ approach essentially means demand for existing, approved medicines could spike without warning if it is discovered that they can form part of a treatment for something other than that for which they were intended.
This should be of interest to investors with an eye on good candidates for ‘off-label’ repurposing of approved drugs.
On chronic illness, there’s no way to say this without sounding cynical. The longer people live, the more health problems they will need to manage. And that’s why investors have long been attracted to disease management. Naturally disease management is distinct from disease treatment in that the products and treatment modalities are not geared toward establishing a cure, but helping the patient live with their condition. Companies like AbbVie Inc. and Vertex Pharmaceuticals have a long history of developing and producing products that improve quality of life for people living with conditions like psoriasis
The bottom line
Savvy investors will avoid trying to pick a handful of future pharmaceutical winners and instead will be looking at ways to capture the broader value of the healthcare sector as it innovates and grows. That will include taking positions on drug developers, delivery systems, and the underlying infrastructure providers like insurance and care systems.
Exchange-traded funds (ETFs) and mutual funds are two options worth your attention if you’re looking for a defensive play with good long term growth potential.
For more ambitious investors, it’s possible to niche down into specific areas of healthcare, without the risks of going all-in on the next wonderdrug. If immunotherapies for cancer and genomics for precision medicine excite you, look for a vehicle that lets you invest in the sector itself, rather than taking a position on one particular stock.