By Chris Eccles, Portfolio Manager at AXA Invesment Managers
New technological advances to meet key healthcare needs are a crucial element driving the performance profile of the healthcare sector. Most recently, obesity drugs have dominated the headlines, but this is an opportunity that has been on many investors’ radar for some time.
For investors, it’s also vital to look ahead at developments that could come to fruition further down the line. Here, driven by rapid technological development and powerful sectoral trends, the healthcare sector presents a promising landscape for potential growth and investment.
There are numerous opportunities for investors seeking to navigate this dynamic market, but five key developments show the potential for long-term investment returns.
There are new technologies set to soar
Breakthroughs are not always well-signalled, and diversification is important, as in any sector. But there are some emerging technologies we are watching carefully.
Radiopharmaceuticals are a new technique for treating cancer. These therapies use radioactive isotopes to target and eliminate cancer cells and could significantly improve cancer treatment. As these treatments become more logistically accessible, we could see rapid growth and gains for companies at the forefront.
Immunology research is focused on finding proteins or genes that have strong genetic association with diseases and on understanding how they interact, leading to the development of combination therapies. As more mature data emerges on cell therapies for autoimmune diseases, this will help us understand whether this niche approach is viable for treating some chronic diseases.
Neuroscience is another exciting field. Innovations therapeutics, including biomarker-driven precision approaches for psychiatric and neurological conditions, are occupying companies’ development pipeline, and we could see some novel approaches emerging.
Biotech valuations are attractive
The biotech sector has displayed signs of recovery, with the Nasdaq Biotech Index (NBI) rebounding from its lows, although remaining about 15 below its previous peak.
Small and mid-cap biotech companies, in particular, offer an attractive investment proposition, with their enterprise value/cash ratio near all-time lows. Furthermore, the upsized follow-on offerings and record financing activities underline the robust investor appetite for quality biotech companies and clinical data, paving the way for a healthy outlook in the sector.
Heightened M&A activity in the biopharma industry, coupled with a supportive regulatory environment and a surge in novel drug approvals, underscores the attractiveness of biotech as an investment opportunity. With sentiment improving and major clinical and regulatory catalysts on the horizon, the biotech sector holds substantial potential for investment professionals seeking to capitalize on this burgeoning market.
Obesity treatment is undergoing a revolution
We are in the early stages of launch for what will likely become one of the largest therapeutics classes in biopharma history, treatments for obesity. Obesity has long been misunderstood and stigmatized as a simple lifestyle or willpower issue, but the narrative is rapidly changing. It is getting recognised as a real medical condition, associated with over 200 health complications.
The new generation of obesity treatments, led by Novo Nordisk’s Wegovy and Eli Lilly’s Zepbound, have shown impressive weight loss effects with tolerable side effects. Furthermore, Wegovy has shown a 20% risk[1] reduction in major adverse cardiovascular events.
Both benefits are well-embraced by physicians and patients, leading to strong launches, while globally reimbursement coverage and supply constraint issues are being gradually ironed out. Due to the long-term attractiveness of the market, a number of potential competitors have emerged, and we are watching developments as to how this may impact the incumbents.
There is a bounce back after COVID
Outside of treatments, we have seen exceptional strength in healthcare utilisation, including general hospital volumes as well as medical procedures. It remains an open question as to whether this is just the beginning of the baby boomer generation entering into the higher acuity phase of their lives, but we see to two main drivers of the current trend.
Firstly, there is a small set of patients and needs in specific areas that are still catching up from covid delays. More significantly, however, has been the easing of labour and cost conditions. As a result, hospital and facilities stocks, as well as large portions of the medical device and supplies sectors will benefit from this trend.
The life science tools and services segment, which experienced challenges in the aftermath of the pandemic, is now showing signs of recovery. Over-ordering during the pandemic led to lower levels of demand in the period since, and consumers drawing down previous stocks led to disruptions in the predictive power of the ‘new orders’ metric reported quarterly by these companies.
With these supply disruptions resolving, and with a growing demand for innovative therapies and cost-efficient drug discovery, companies in this space are poised for long-term growth, making them attractive investment targets.
The result of the US election could have an impact on drug prices
The big trends driving healthcare – longevity, demographics, and the impact of AI on medical research – are largely impervious to short-term political moves. Nonetheless, the US political landscape plays a pivotal role in shaping healthcare regulations, particularly in terms of patient access and drug pricing. With the implementation of the Inflation Reduction Act (IRA) and ongoing discussion of healthcare reform, we are monitoring the potential for impact of regulatory changes on the prioritization of R&D spending and acquisitions within biopharma.
Despite muted discussion of healthcare regulations in the current election cycle, the implications of the IRA and potential adjustments under a new administration remain critical factors. We expect that Republicans would see a large-scale repeal of the IRA as neither feasible nor politically attractive. The implications of the IRA on the prioritisation of R&D dollars as well as acquisitions within biopharma remains a key topic. It also remains to be seen how direct price negotiation with the US government will affect volume and private payor positioning for the first 10 drugs being affected by IRA reforms.
