Uncovering opportunities in health care

Recent and ongoing developments in health services, medical technology, and pharmaceuticals, paired with accelerating trends toward automation, digitization, and robotics have set the stage for the health care sector to shine in the coming years. We believe there are several exciting innovations and trends that could bolster the asset class over the long term.

What comprises the health care sector? 

It’s important to bear in mind that the health care sector encompasses medical technology and devices, different drugs, and services. Each of these categories can be broken down further. For example, consider that “health care services,” refers to several unique, niche subsectors, such as MCOs, health care software companies, pharmacies, and hospitals, rather than a homogenous group of stocks. 

Health care is a broad, diverse industry with defensive and offensive capabilities. In our view, this diversity of companies, products, and services within health care is part of what has made the sector such a strong performer in the past and why we’re so optimistic about the future. 

Innovation inspiring optimism

Broadly, one of the reasons we’re so optimistic about the investment potential of the health care sector is the level of innovation in this space. Both research and development capabilities and industry output are improving. New, first-in-class drug approvals are evidence of this output. 

This output has ticked up recently thanks to smarter drug discovery and development. Tools like machine learnings and structural biology have helped shorten early development timelines in the drug industry. Clinical development has sped up as well, with better industry participant decision making. The approval process has also become shorter for certain diseases with high unmet needs. 

What’s more, there are new platforms, such as genetic medicine, that enable more effective drug development. Genetic medicine, which includes gene therapy, gene editing, and RNA therapy, is a novel platform that opens the door to a whole suite of possibilities that didn’t exist in the not-so-distant past. On top of this, general advances in automation, robotics, and digitization will enable transformative innovation for years to come. These improved development processes have given way to exemplary new drugs, treatments, and research for three critical medical needs: diabetes and obesity, Alzheimer’s disease, and cardiology. 

Diabetes and obesity
In the past year, a new class of injectables that lead to safe weight loss of as much as 20% of body weight were approved to help treat obesity and diabetes. This is unprecedented and suggests long-term revenue potential in the pharmaceutical industry. Looking ahead, what could create even greater revenue potential is an equivalent drug in oral form. Right now, there’s a dramatic mismatch of supply of these injectables and demand. Injectables are currently dispensed weekly through disposable pens, but given the large patient population requiring this drug, this weekly dosage creates challenges in scaling supply to meet demand. It’s a complex manufacturing challenge, but an oral form of this drug could unlock this market more effectively.

Advancements in diabetes and obesity treatment go beyond drugs. Insulin pumps that regulate insulin have improved, and perhaps even more importantly, can now interface with continuous glucose monitoring devices with algorithms that control insulin dosing based on sensor feedback.

Alzheimer’s disease
There’s also been a recent approval for the first significant, disease-modifying drug to help treat Alzheimer’s disease. This drug clears plaque, a process which has been shown to slow the rate of cognitive decline. We see this as a critical milestone and positive anticipatory sign for the future of Alzheimer’s drugs. Notably, there are other potential disease-modifying drugs currently in clinical development that we believe could help address the significant unmet needs of Alzheimer’s patients.

Cardiology
There’s also been innovation in cardiology. Breakthrough drugs for rare cardiovascular diseases have been introduced, and for the first time in a decade, better drugs for lowering cholesterol and treating high blood pressure are available.  

Not only have drugs improved, but so have surgical possibilities. Lately there have been incredible advances in heart valve repair and replacement. Progress we’ve seen in trans-aortic valve replacement is starting to expand into bicuspid valves, which could be a tailwind for the next five to 10 years, at least.

As these new, innovative drugs are more widely used, we’ll monitor the longer-term effects and keep an eye on any relevant developments among insurance providers. For example, currently, neither Medicare nor several private insurance providers cover obesity drugs. This could inhibit the revenue potential of these new drugs unless policies change.

Overall, while the health care sector has an impressive historical track record, given these new innovations, we are particularly optimistic about its growth potential and the possibility of compelling future returns.

COVID recovery offers stabilizing effect 

The COVID-19 pandemic has impacted certain parts of the health care sector differently than others. Within health care services, the managed care subsector has been resilient throughout the pandemic, while hospitals, dialysis companies, and other facilities were hit hard. Within medical tech, life science tools companies that develop therapeutics and conduct research performed well, as they drove treatments for and vaccines against COVID. Medical devices, on the other hand, struggled first because elective procedures shut down in 2020 and 2021, and later because of supply-chain disruptions, especially among chips. But now, all this is behind us. 

In medical tech and services, we’re more or less back to normal, with the worst of the COVID pandemic behind us. The number of medical procedures has gone back to pre-COVID levels, some of the supply-chain pressures have abated, and while inflationary pressures remain, they’ve mediated to some extent. Tides are beginning to turn in a favorable manner, which could bode well for earnings and revenue growth as well as usher in an upside in multiples and earnings estimates. 

What’s more, the COVID pandemic laid bare just how behind the curve the world was in terms of infectious disease preparedness. As a result, funding for infectious disease treatment and prevention have increased, further supporting the health care sector overall. 

Systemic changes to service models

We’re in the process of migrating to a new way of paying for health care services. As it stands today, our fee-for-service system incentivizes people to do more, not better. While this has been a known issue for quite some time, in our view, it hasn’t been until recently, with advancements in technology, that we’re seeing successful attempts to remedy this system.

We believe that managed care companies are driving this charge. The government employs these companies to find quality products and services and package them in a cost-effective plan to groups of people at scale. We’re only going to need more of this in years to come, which bodes well for these companies and their business models. 

Other services that may benefit from improving technology are those that lean into digital health, such as those providing virtual appointments. At-home, remote appointments tend to be less expensive and easier to access for a greater number of people. The growth potential here is sizable. 

A strong, long-term case for health care 

The concurrent trends of groundbreaking innovation, pandemic recovery, and technological advancements come together to create a strong, long-term case for health care investment. This, coupled with the fact that the asset class has historically generated strong returns, gives us reason to believe that the health care sector is well-positioned in the years to come.