Think big, not small, in healthcare investing

Healthcare is a sector designed to produce some big winners -- including investors smart enough to stay invested over the long haul.

Demographic shifts will intensify the pressures on healthcare systems and demand new directions in the delivery of healthcare.

The global population is getting older.

Ageing populations in both emerging and developed countries are driving up the demand for healthcare.

More healthcare resources and service innovation are needed globally to deliver the long-term care and chronic disease management services required by a rapidly-increasing ageing population.

At the same time, developing countries are experiencing significant growth in their middle class. Approximately 65 per cent of the global population will be middle class by 2030.

Accelerated urbanisation and access to middle-class comforts are promoting sedentary lifestyle changes that will inevitably lead to greater incidence of obesity, diabetes and other costly health conditions.

Hope for a better life

Mankind’s deep desire for healthier lives would mean that healthcare demand will continue to be unmatched for the decade to come at least.

Modern medicine may soon allow us to overcome diseases and conditions considered incurable today. For example, medical scientists are able to re-engineer immune cells and direct them to help fight cancer.

Going forward, similar approaches could be used to treat a wide range of diseases.

The rapid advances in genomics are resulting in less expensive genome sequencing. The cost of getting an individual’s gene (or DNA) sequenced was approximately $100 million 16 years ago, but now the cost has plummeted to just $1,000.

This trend is beginning to affect how human diseases are diagnosed, and may usher in an era of personalised medicine that takes into account each individual’s genetics, as opposed to the current status quo of a “one-size fits all” drug for everyone.

Healthcare is a sector designed to produce some big winners – including investors smart enough to stay invested over the long haul.

Fear of unknowns

Deeply etched in the human brain is the fear of the unknown, the fear of suffering from incurable diseases.

The reality is that chronic diseases and conditions are on the rise worldwide. An ageing population and changes in societal behaviour are contributing to a steady increase in these common and costly long-term health problems.

Cancer is one of the more lethal diseases – in Singapore, it accounts for about three in every 10 deaths and is by far the largest cause of death.

Current cancer treatment – primarily chemotherapy and first generation cancer drug – is not effective in curing this disease.

Immuno-Oncology (I-O) is an innovative cancer treatment which helps to enhance one’s immune system to fight cancer.

There are signs of stronger survival efficacy for immuno-oncology. By helping the body identify tumour cells, immuno-oncology drugs should help patients naturally eliminate cancer more effectively and with fewer side effects than chemotherapy. At present, Immune-oncology is not yet a perfect cure. There will be setbacks as the drug treatment gets refined through a period of trial-and-error.

The field of immuno-oncology offers several new drug targets with largest market opportunities, and the leaders in the field are likely to control a disproportionate share of the economics.

The leaders in IO drug development are large, diversified companies, and IO is becoming increasingly important for these firms.

Healthcare: one of biggest value creation of the next decade

According to Frost and Sullivan’s – one of the leading healthcare business consultants – estimates, over the next decade, pharmaceuticals sales are expected to grow by 60 per cent to $1.35 trillion per year; biotechnology’s sales can more than double to $136 billion per year; and the revenues of medical devices can increase by 1.8 times to $510 billion per year.

Due to the demographic shifts, we are at the cusp of one of the biggest value creation of the next decade.

The additional sales just by pharmaceuticals, biotechnology and medical devices generated in 10 years’ time is estimated to be more than a staggering $800 billion per year – that’s equivalent to creating not just one global chain of McDonalds, but eight of them. 

Navigating healthcare investing

#1: Think big, not small: Stock prices for pharmaceutical companies can ratchet up overnight, or crash on news on clinical trials or even merger and acquisition activity. This is especially true for companies which are often too small for larger asset management firms. There is a need to think big, not small in healthcare investing. It is important to invest in the large and established healthcare firms with dominant market shares that can produce strong and sustainable cash flows year in year out.

#2: Stick with an expert: Investing in healthcare poses a unique challenge. Healthcare is enormously complex, only rewarding fund managers with deep technical understanding of scientific and regulatory developments within the industry. It is the often binary nature of healthcare investing — a drug under development either works or it doesn’t — that offers opportunities for talented active managers to generate alpha. Historically, only 10% of drugs that enter human clinical trials become commercially viable, and identifying the winners in advance — finding that “needle in a haystack” — is fraught with risk. This is better suited for skilled active managers, particular those with scientific and medical training.

#3: Healthcare for diversification: Healthcare stocks typically fare better in market downturns for the simple reason that incidences of heart disease, diabetes and cancer don’t abate as the economy softens. In four of the past five stock market corrections of 10% or more, the health care sector has outperformed the broader market as a whole.

My original article was published in the Straits Times on 1 Oct 2018