At a glance
In the current environment, due to its defensive nature, the healthcare sector can act as a good portfolio diversifier. We like the sector as it should see relatively less disruption due to the pandemic outbreak. But even over the longer term, the outlook for healthcare looks very attractive, particularly driven by an aging global population. We see opportunities in the health technology, genetic therapies, and oncology space.
What is the coronavirus impact on the health care sector?
While markets have been volatile over the past months due to the coronavirus outbreak, one sector that has held up relatively well is healthcare. Demand for most drugs is relatively inelastic, and the majority of pharma companies have indicated a limited impact on revenues and supply chains so far. Medtech companies that supply elective procedures saw a rapid demand slowdown in late March, but we expect most procedures to come back, and recent data indicate this is beginning to happen as economies start to reopen.
We maintain a preference for the sector globally, given its more stable earnings and cash flow generation and well-covered dividends. The sector’s aggregate valuation is close to average levels. We expect earnings trends to drive relative performance in the near term.
Taking a view on the longer term, the prospects for the healthcare space look attractive in our view. An aging population (on average a person born in an OECD country today can expect to live to 81) drives demand for healthcare products and services. It is also putting more pressure on healthcare budgets, spurring healthcare providers to explore adopting new technologies. This change has been accelerated by the coronavirus crisis.
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The impact of the coronavirus on markets
- Healthtech. During the crisis, telemedicine has enabled individuals to access routine medical care without risking exposure to the virus or further straining the healthcare system. Since the outbreak began, one leading medical consultation platform experienced a 1,000% rise in monthly active users. Importantly, telemedicine also has the potential to lower the cost of care. We estimate that a telehealth consultation in the US costs around USD 50. The American Journal of Emergency Medicine has estimated that each telemedicine visit saves a net cost of USD 19–121. But telemedicine is just one aspect of a larger trend toward healthcare technologies, or "healthtech." The healthcare industry generates 5% of the world's data, yet remains one of the world's least digitalized industries. Healthcare data is estimated to reach 2.2 zettabytes in 2020 and 23 zettabytes by 2030. Over the next decade, we expect a set of data-driven technologies, such as robotic surgery and artificial intelligence-assisted diagnostic imaging, to make healthcare more effective, efficient, and accessible.
- Genetic therapies. Genetic therapies will probably not provide a cure for viral diseases like COVID-19. But they could significantly help healthcare systems improve service provision, something likely to come heavily into focus post-crisis. Unlike traditional drugs, genetic therapies aim to cure diseases by modifying or removing faulty human genetic information, actually removing the cause of illness. This represents a paradigm shift in medical care today, which usually just slows disease progression or relieves symptoms, requiring lengthy and costly care. So far, four of these treatments have been approved in the US, and the FDA has indicated it expects to approve 10–20 new cell and gene therapies every year by 2025.
- Oncology. As we age, our cells mutate in new ways that can cause cancer. As life expectancy rises, the number of new cancer patients will outpace population growth—new cancer cases could rise to over 27 million a year by 2040 according to the World Health Organization. The market for cancer therapeutics is currently around USD 150bn, and could reach nearly USD 250bn by 2025. Longer-term, we expect the market to grow in mid- to high-single digits. Beyond drug treatments, a number of cell therapies have now been approved for use. These offer the hope of long-lasting remission based on one-off treatments, albeit in a small number of patients so far. The long-term nature of drug development in the oncology space provides an opportunity for long-term investors to capture an illiquidity premium through private market investments in the area, including impact investment opportunities.
Key investment takeaways:
- Healthcare, due to its defensive characteristics, is a good diversifier over the near term in an uncertain environment in our view.
- The sector also offers strong long-term prospects, and we have also seen glimpses of its potential during the coronavirus crisis.
- We see ample opportunity in the health technology, genetic therapies, and oncology space, particularly for those who are willing to lock up capital over the longer term.
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