How to approach the healthcare sector?
The growth of the healthcare sector is benefitting from many structural tailwinds such as demographics, increasing access to care and scientific innovation, providing sustainable drivers of revenue growth.
Healthcare has generated good returns for investors. Since 2000, the average annual return of the USA MSCI Healthcare index has been just over 8% (in US dollars) compared to 4.74% for the MSCI World. We believe the revenues and profits of the healthcare companies will continue to increase at a similar pace as in the past and therefore lead to similar returns for shareholders. Yet the main industry beneficiaries are changing, just as growth factors are.
As health systems across the world start to encounter financing issues, cost effectiveness is becoming more relevant than ever. In the US alone, 2% of Gross Domestic Product (GDP) is wasted in healthcare inefficiencies each year. Reducing these inefficiencies is a big opportunity, offering significant potential for companies to boost profit growth and for governments to bring down the health expenditure-to-GDP ratio.
With this in mind, we believe investors should rebalance their intra-sector exposure towards medical devices, life science tools, diagnostics and IT services. These are the areas, we believe, that have the greatest potential for growth. By contrast, with profits already high and the pressure to contain costs rising, we are more prudent on the biggest beneficiaries of inefficiencies—public hospitals, physicians and large pharmaceutical companies.
There are several areas where health outcomes could be improved. Personalised medicine, the customisation and optimisation of healthcare for individual use is one. For example, targeted drugs for each sub-type of lung cancer are much more efficient than those that treat lung cancer in a broad, undifferentiated way.
Gauging the response rate to therapy is another key area where inefficiencies could be addressed. Today, in most cases doctors are unable to predict which patient will respond to therapy and for how long. Most of the traditional diagnostics tools, be it imaging or simple blood tests, fail to identify a lack of response early enough. Usually, unresponsiveness is identified long after a therapy has stopped working, leading to poor outcomes and useless costs. Together, too broad an approach to therapy and failure to measure the effect of therapy are the main sources of clinical waste.