Peter Ball, 25 August 2022

The healthcare sector is a beneficiary of several powerful trends, which makes it highly attractive from an investment perspective.

Healthcare is an integral part of our everyday lives, and this also gives the sector an element of defensiveness. Governments are grappling with rising healthcare costs and finite budgets, which means change is inevitable, as are investment opportunities.

We believe companies that provide differentiated products and services will lead the industry forward, while more mature businesses risk being left behind.

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A sector with powerful growth drivers

Healthcare is one of the largest industries in the world. It represents annual spending of around US$8 trillion, and this is expected to continue to grow steadily over the long-term.

The sector is broad and includes companies that operate across the entire healthcare supply chain such as biopharmaceuticals and equipment manufacturers, life sciences and healthcare operators (hospitals and other types of healthcare providers).

While these sectors all have their own unique business models, they all benefit from several very powerful long-term structural trends.

One of the these is the ageing population. Over the last 50 years, the share of the population aged over 60 years has increased from 8 per cent to 13 per cent.

This is expected to jump to 21 per cent over the next three decades, equating to over one billion people. These figures are important because healthcare spending for people aged over 60 is disproportionately higher than for those in younger age groups.

The demands of a rising middle class is another important factor. The growth of the middle class shows no sign of slowing and is expected to make up two thirds of the world’s population by 2030. Over time, this group will make up a significant portion of overall global healthcare spending.

We also shouldn’t underestimate the technological advances in genomics and biotech. These have pushed therapeutics in new directions, and the number of known diseases and treatable targets are now at all-time highs.

Today’s therapies are treating diseases once thought to be untreatable. These innovations are producing more targeted interventions allowing physicians to tailor treatment to individual needs, improving overall healthcare outcomes.

Is healthcare spending sustainable?

These trends all emphasise the increasing demand for healthcare products and services and in most countries, it is the government who foots the bill. Healthcare is a large cost for most developed economies, and it is not sustainable for spending to increase faster than economic growth.

Fortunately, action is being taken to not only make healthcare more efficient, but also to improve patient outcomes. This represents a significant opportunity for companies that are positioned to help in achieving these goals.

What steps is the sector taking to help?

Despite significant scientific breakthroughs in medicine and the large number of new treatments available, many of these won’t work for a reasonable portion of patients. As an example, some of the most prescribed cancer drugs in the world only help a fraction of the patients they are given to.

However, advances in genomics, diagnostic tests and targeted drugs are enabling the increasing personalisation of treatments, ensuring patients receive the most appropriate treatments.

The use of remote online consultations and remote patient monitoring surged during the COVID-19 pandemic. As this becomes more sophisticated, the burden of disease management should shift away from healthcare providers and toward individuals, improving outcomes as well as saving costs.

There is also an increasing shift toward flexible pricing. The most common healthcare payment model is fee-for-service, whereby providers are reimbursed for every test, procedure, and treatment provided. This rewards them for the number of services provided, regardless of the outcome.

The industry is moving toward outcome-based payment methods, where healthcare providers are paid to keep a given population healthy. Providers are incentivised to identify conditions at early stages, improving the quality of outcomes and reducing the cost of treatment.

It is estimated that 30 per cent of emergency room (ER) visits in the US among patients with chronic conditions are unnecessary either because these were preventable, or they could have been treated in an outpatient setting.

In recent years, US health insurance businesses have been partnering with alternative healthcare providers as well as creating their own clinics to provide care for chronic illnesses, stopping unnecessary ER visits and reducing costly insurance payouts.

Investors should focus on companies leading the change

These are just a small number of the changes taking place across the healthcare sector. As the landscape evolves, it will be those which embrace change that flourish while businesses that are slow to react are likely to face disruption.

We believe the healthcare sector has an extremely bright future. It has defensive attributes that will please many conservative investors, as well as exciting growth prospects.

Many of the healthcare companies we follow, both in Australasia and further afield, are likely to benefit from rising demand for their services over the long-term. Their strong market positions also leave them extremely well-positioned to navigate the changing healthcare landscape.

For more information on these opportunities please visit the Craigs portal or contact your investment adviser.