The challenge with investing in the healthcare sector is that the big growers are just a happy few. Many investors missed the performance by staying in big pharma household names that were busier trying to find the post-pandemic normal than growing strongly. The fear now, of course, is that they may have missed the boat for good. We do not think so. Our equity strategists reiterate the call on healthcare.
Growth for volatile times
As greater economic uncertainty and a rotation out of the ‘Magnificent 7’ stocks had investors looking for defensive returns, this has reinforced the healthcare sector’s appeal as a safe haven. Pharma stocks in particular offer highly visible long-term growth prospects, largely uncorrelated with the business cycle. Despite a broader market sell-off, healthcare earnings have remained resilient in Q2, as the sector exhibits its own unique cyclical patterns that are less impacted by the overall economy. Certain segments, such as pharma and obesity, exhibit strong growth potential driven by strong unmet demand. These factors should contribute to the sector’s outperformance and its ability to serve as a refuge during market downturns.
Tremendous progress in medical science has enhanced the quality of healthcare and disease prevention efforts. Life expectancy has improved thanks to better medical care, hygiene and diets, and with an aging global population, healthcare will continue to be a growing industry.
Recent earnings reports have been encouraging, with many healthcare companies exceeding expectations and raising their guidance, leading to upward revisions in consensus earnings estimates. While biotech has underperformed the rest of the healthcare sector YTD, there are signs of improvement, such as funding conditions and increased IPO activity in biotech. Although large-cap pharma takeouts have been limited, this could change in the coming year.
Obesity market: Significant growth to come
The market for healthcare related to obesity has shown signs of a market growth opportunity. Especially as unmet demand remains huge, and new competition for obesity drugs will not enter the scene much before 2027.
There are also already over 50m patients on US formulary access waiting to receive treatment, and healthcare companies in this area can currently only treat about 3 million patients by year end 2024. Formulary access will soon be expanded to 100 million patients in the US – and this is only one region. The 3 million figure is key here, dwarfed by more than 800 million people suffering from obesity globally. Of course, to treat this many people, obesity drug prices will have to come down. Volume growth, operating leverage, efficient production, and cost leadership will all come into focus. To meet this demand, companies will invest about USD100 billion in capital expenditures until 2033, making this the largest investment programme in pharma history.
What does this mean for investors?
Currently, investors are still piling into cash despite the modest rate prospects. Money market funds have seen massive inflows in the past weeks. So while the saying goes “cash is king” – history tells us that it is only king for a moment. Especially with the current and potential market volatility, the long-term overview presented by our technical analysts show the dismal underperformance of cash in the long run, drawing even more contrast to the stellar growth prospects in healthcare.