Written by Ailsa Craig and Marek Poszepczynski, portfolio managers at International Biotechnology Trust
The biotech sector has languished behind equity markets as a whole over much of the past three years since investors deserted it following the correction that took place in 2021. The sector valuation tends to run in cycles from boom to bust and back again, but this last downturn was the longest in the sectors’ history. The five-year performance for the Nasdaq Biotechnology Index, the leading benchmark for the sector is flat. Looking at the performance, one could be forgiven for assuming that the sector has little to offer. In fact, the opposite is true.
The global healthcare industry benefits from several fundamental tailwinds that look capable of driving structural growth for many years, if not decades, into the future. Many of these relate to demographics, where the increasingly complex demands of a global population that is growing older, richer and sicker, are driving rising demand for healthcare services in general and underpinning a particularly strong secular growth story in biotechnological innovation.
Due to advances in medicine, and generally healthier living conditions, life expectancy across the world has vastly improved in recent times, reaching an average 71.0 years in 2021, compared to just 66.1 years at the turn of the century . The gains in life expectancy have been greatest in the developing economies of Africa and Asia, but this has been a global phenomenon with the populations of North America and Europe also now generally living for longer. As a result, the global population of over 65s is projected to increase to 2.5 billion by 2100, up from 650 million in 2017.
Meanwhile, as living standards in the developing world rise towards those of the developed world, the demand for better access to medicines and health services compels governments to spend a greater proportion of their GDP on healthcare.
Although the globally aging population is undoubtedly a societal positive, old age naturally predisposes humans to diseases. After the age of 50, biological wear and tear begins to take an increasing toll on the human body, requiring increased consumption of healthcare resources. Cancer, cardiovascular diseases and dementia are among the high-profile ailments that are commonly associated with age, and all of them require drug-based treatments.
In combination, we should expect the fact that the global population is growing older, richer and sicker to drive robust growth in demand for pharmaceutical products in the years ahead. This should represent one of the most reliable – and investable – trends of the investing world in the decades to come.
Currently, the US is the largest healthcare market in the world by far. In 2022, the US spent 16.6% of GDP on healthcare, compared to the OECD average of 9.2%. Per capita health expenditure in the US is expected to increase from $13,413 in 2022 to $20,425 in 2031, an annualised growth rate of 4.3%. Healthcare spending growth in emerging markets, however, is expected to be even stronger, driven by faster growth in the elderly population and continually improving economic standards. This is evidence that healthcare is a genuinely global growth industry – and, over time, we should expect the healthcare spending rates in the developing countries to rise substantially to match the rest of the world.
Improving living standards and increasing life expectancies clearly bring with them many societal positives but, with budget-constrained governments ultimately on the hook for at least a proportion of the rising cost of healthcare provision, there are also challenges to overcome.
Fortunately, the confluence of advances being seen across scientific and technological disciplines is fuelling an unprecedented wave of innovation from the healthcare sector, with biotechnology companies leading the way.
The impact of ongoing biotech innovation is clearly evident in the data for new clinical trials and novel drug approvals. More clinical trials are being registered than ever before – nearly 40,000 trials were initiated in 2023 alone, which is a new annual record. In turn, we are seeing a higher number of regulatory approvals for new drugs. The US Food and Drug Administration (FDA) approved more than 50 novel drugs in 2023, the second highest annual total ever seen, and the vast majority of new drugs are originally generated in biotech companies rather than in the R&D departments of pharmaceutical companies.
This wave of innovation is also delivering a constant supply of new investment opportunities in biotech companies with exciting products that can meet the evolving needs of patients globally. Selective investment in biotech businesses which focus on high unmet medical need, with attractive valuations, outstanding technology and significant future earnings potential are the keys for unlocking value in the sector.
A sector with such strong fundamental tailwinds deserves to be better appreciated by the investment community. We anticipate that these global demographic trends will underpin outperformance from the healthcare sector in the years ahead. Within healthcare, we believe biotech should do even better.
