Healthcare stocks fell less than the wider global equity market and rebounded faster from the stock market rout triggered by Covid-19 in February and March 2020. It may seem unremarkable that healthcare investing proved a good place to be amid a global pandemic, but the longer-term picture is even more encouraging.
The healthcare sector has consistently outperformed the broader market over longer timeframes, driven by demographic trends such as an aging population, rising middle class and chronification of diseases.
Over the past 10 years, the MSCI World Healthcare index has risen 347%, outperforming the MSCI World index in sterling terms by 82 percentage points. Since the healthcare index began almost 27 years ago, it has soared 1,784%, outperforming global equities by 982 percentage points.
‘This is a sector that over the mid- to long-term has consistently outperformed the broader market,’ said Michael Schröter, Co-Head of Sustainable Healthcare Equity at HSBC. ‘There’s a continued need for new products and services, which makes it an interesting sector to invest in.’
Alongside its defensive characteristics, healthcare investing is benefiting hugely from secular growth trends. Increasing demand for healthcare services translates into strong earnings growth. At the same time, however, rising costs threaten the affordability of healthcare and make investing in the companies innovating to stave off a looming healthcare crisis an investment in society.
‘The biggest challenge to the sustainability of the healthcare sector is rising healthcare costs,’ said Schröter. ‘Both from a societal but also from a business perspective, companies need to respond to that challenge so that their products and services meet these new customer needs.
‘In the past, customer needs have been predominantly clinical – better clinical outcomes for patients. Patients still want to have increased clinical benefits but healthcare needs to remain affordable. The way to make it affordable but still profitable is to help reduce overall healthcare spend.’
Global Healthcare Challenge
Healthcare spending has outpaced economic growth for years. In the last decade, it has almost doubled and now represents 18% of gross domestic product in the US (according to data from Statista) and 9-13% across Europe (according to the OECD).
‘This is the problem that has to be tackled and we are searching for companies that bring a solution to the table,’ said Nathalie Flury, Co-Head alongside Schröter.
‘We are not only investing in companies that develop drugs; we’re also investing in sub segments of the healthcare space, such as medical devices, diagnostics, digital and service companies.’
‘We want to see innovation across the value chain to provide an improvement over the current standard of care in the market, but we also want to see from health economics data that these solutions can reduce healthcare costs overall.’
There are many ways in which companies can deliver a clinical benefit while reducing total healthcare spend – from disease prevention and cure instead of treatment and chronification to a reduction in hospitalisation, hospital readmission and recovery times.
Being able to diagnose and treat a disease early can lead to a very different clinical outcome and, crucially, significant cost savings for those footing the bill for healthcare provision, whether governments or medical insurers.
One company that the managers like is Guardant Health, a market leader in early and non-invasive cancer diagnosis, which grew its revenues by an estimated 28% in its last financial year. To match cancer patients with the best treatments, the company’s FDA-approved Guardant360 diagnostic test provides oncologists with comprehensive genomic results from a simple blood sample. This liquid biopsy overcomes some of the limitations of traditional tissue biopsies.
Furthermore, Guardant Health is developing a liquid biopsy test that aims to detect early-stage colorectal cancer from a blood sample instead of a colonoscopy. The market opportunity for liquid biopsy in the US alone is estimated at $6bn.
Diabetes treatment is another area of growing clinical need where innovation is exerting downward pressure on costs. Flury gave the example of combining minipumps with continuous glucose monitoring systems for diabetes sufferers.
‘The loop between the information of the glucose level and the pump means that patients receive the exact volume of insulin needed,’ she said. ‘There is data that shows these patients are much better monitored, use less insulin and have fewer diabetic complications arising over time.
‘Not only are they better cared for, but it’s cost effective and reduces the healthcare cost for every single patient.’
Making Healthcare Sustainable
Newspaper headlines around the world allude to the unsustainability of rising healthcare costs. As medical costs continue to grow, a basic social need becomes inaccessible to much of the population, whether through governments restricting access or medical insurance premiums rising.
In the UK in February, the National Institute for Health and Care Excellence rejected a breast cancer drug for routine use by National Health Service patients in England on cost grounds.
The decision was reversed in August after a discount was agreed with the manufacturer.
Meanwhile, in the US, which lacks a universal healthcare system, more than 40% of patients missed a treatment dose last year due to cost or other factors.
To make healthcare systems sustainable, Schröter stresses that they must work for all stakeholders – patients, doctors, payers, companies and investors.
‘It has to work for the whole system, be those payers, patients, physicians, as well as industry and investors,’ he said. ‘If it doesn’t work for one stakeholder, it won’t be sustainable and won’t last over time.’
The field of antibiotics is testament to that. The World Health Organization has warned that declining private investment and lack of innovation in the development of new antibiotics are undermining efforts to combat drug-resistant infections.
‘We need to have new, innovative treatments to fight bugs but it also needs to be profitable for companies and investors to invest in and to conduct R&D [research and development] – one of the current challenges in the antibiotics space,’ added Schröter.
‘We need to have novel ways to incentivise companies and investors while making sure that new treatments remain affordable in order to benefit everyone – patients, payers and society at large. That’s what will make healthcare sustainable.’
Nathalie Flury has enjoyed a lengthy and successful career running healthcare funds. Prior to the launch of the HSBC Global Equity Sustainable Healthcare fund in July 2021, she managed funds for GAM, Julius Baer and Pictet. Of particular note was her performance in the middle of the last decade. During a significant boom for the healthcare industry from September 2011 to July 2015, she generated returns of 195%, compared with 133% for the average manager in the sector.
SOURCE: Citywire Discovery, as at 31 August 2021. Performance is based on total return in USD calculated gross of tax, bid to bid, ignoring the effect of initial charges and with income reinvested at the ex-dividend date. Average manager is the based upon the managers tracked globally in Citywire‘s Equity - Pharmaceuticals and Healthcare sector.
SOURCE: HSBC Asset Management as at 31 August 2021. Reference Benchmark: 100% MSCI World Healthcare Index (USD)
The portfolio is significantly overweight biotechnology stocks, relative to the reference benchmark, with more than a third of the portfolio dedicated to them. This overweight to biotechnology makes sense as the fund is seeking innovative companies to tackle rising healthcare costs and much of the innovation within the healthcare space comes from biotechnology companies. This has come at the expense of pharmaceuticals companies, which make up 4% of the fund versus 38% of the index. When looking at the top 10 holdings, it is immediately apparent that none of the major pharmaceuticals companies are present.
Geographically, their stock selection has led them to have a huge slice of the fund in the US, with close to 90% of the fund invested there. Given the size of this stake, only a few other countries are represented, and most strikingly an off-benchmark position in mainland China.
Other than the absence of pharmaceutical majors in the top 10, the other notable characteristic is that the stocks are from across the market-cap spectrum with large small-caps through to large-caps. This reinforces that managers‘ notion that best opportunities for innovation come from the mid-cap space.
SOURCE: HSBC Asset Management as at 31 August 2021. Reference Benchmark: 100% MSCI World Healthcare Index (USD)
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