2020 Outlook Series: Global Healthcare

Amid the pandemic and volatile global markets, the healthcare sector has emerged as one of the best-performing areas of the market this year¹. We look at the sector’s resilience in difficult market and economic conditions and provide compelling insights for developments in the sector.

Regardless of the global economic cycle, we expect the healthcare sector to benefit from a number of secular demand trends which should continue to support its long-term growth trajectory. These tailwinds include: a demographic ramp in aging populations, major advances in Cancer and Cardiovascular medicine (driving increases of life expectancy), and massive increases in healthcare expenditures as a result of advanced treatment options and corresponding increases in end market demand for healthcare products and services.

Aggregate life expectancy globally continues to expand as a result of advances in disease prevention, improved surgical/interventional procedures, and advanced therapeutic treatments. Simply put, older patients require additional treatments, procedures and care. Despite recent advancements in care, profound unmet medical needs still exist today — with the majority of these needs currently falling into three main categories: Central Nervous System disorders (CNS), metabolic syndrome/obesity, and rare or orphan disorders.

For example, no disease-modifying treatment options currently exist for the most serious CNS disorders, including Alzheimer's, Huntington's Disease and Parkinson's Disease, etc. What's more, current treatment options for major psychiatric disorders remain suboptimal. Direct treatment costs globally for these disorders continue to rise at an astounding rate: in the US, expenditure on Alzheimer's disease alone is now almost $300 billion each year¹. We believe that the first disease-modifying treatment could have a significant impact on this cost dynamic.

Metabolic syndrome continues to rise in developed nations. This condition is an established risk factor for cardiovascular disease and predisposes patients to multiple cancers and osteoarthritis/joint replacements. Improved treatments for metabolic syndrome hold the potential to bend the healthcare cost curve.

Finally, the medical community has identified approximately 7,000 rare or orphan diseases²: such as hemophilia, sickle cell disease, and lysosomal storage disorders. More than 450 new medicines/gene therapies are in development today as treatment options currently exist for only approximately 5% of these diseases².

As such, we believe that healthcare products and services capable of addressing unmet medical needs while curtailing aggregate spend, will be rapidly adopted.

In general, the healthcare sector should continue to experience significant long-term growth in demand for years to come on the back of previously mentioned secular trends. We believe this will lead to steady organic growth and expanding margins for select companies across the sector that can offer groundbreaking products and services for previously undertreated/untreatable conditions that can simultaneously bend the healthcare cost curve.

We believe the strategy is well positioned in this regard, as we have built a diversified portfolio of healthcare companies that seek to address unmet medical needs, pursue underappreciated market opportunities and demonstrate an ability to bend the healthcare cost curve. Toward this end, we advocate a modest overweight to select biopharma companies and a modest underweight to select services companies.

Political uncertainty, as a result of the upcoming 2020 US presidential election, is a factor. As was common with past U.S. election cycles, the healthcare sector may experience near-term volatility as we approach polling day, with investors weighing possible changes to the healthcare policy landscape. Sentiment surrounding the different sub-sectors may also shift in response to various candidates' proposals, as healthcare is a crucial topic for presidential candidates.

Notwithstanding, we continue to view this as an opportune time to invest in the sector, as underlying fundamentals remain strong with organic growth continuing to be a key driver for earnings outperformance. Indeed, earnings for the third quarter of 2019 impressed with the healthcare sector exhibiting the highest EPS growth in the broader economy of approximately 10%3. In addition, the sector remains one of the most recession resistant areas of the economy as evidenced by its meaningful outperformance during the last two downturns.

As we approach 2020, sub-sector allocation within the healthcare strategy will remain critical. Towards this end, we have recently trimmed our overweight in hospital supplies/devices and tools companies. We think these sub-sectors will continue to offer solid long-term growth potential, although valuations in certain names have become extended. We maintain positions in reasonably valued companies within these sub-sectors that have exposure to high-growth markets that are addressing unmet medical needs. Examples include surgical robotics, interventional stroke, mitral valve repair, mass spectrometry and continuous glucose monitoring.

In other sub-sectors, such as biopharma and healthcare providers & services, diligent stock selection will be crucial. We advocate a modest overweight in biopharma, emphasising select companies with best-in-class product portfolios and growing pipelines that can hold their formulary positions in an evolving market. In contrast, we aim to avoid or minimize exposure to positions in companies that are at risk for therapeutic substitution, have undifferentiated product pipelines, or that have relied heavily on excess price increases over time to drive top-line growth.

We are underweight healthcare providers & services companies, as we see continued threats to select supply-chain companies – specifically pharmacy retailers and drug wholesalers. We expect these companies to see heightened pressures from decelerating drug inflation as well as opiate litigation liability.

Notwithstanding the aforementioned headline risks, we believe that the sector’s defensive characteristics coupled with its strong organic prospects will provide continued outperformance over a full market cycle. As ever, our focus is on the importance of stock selection as a potential driver facilitating outperformance.

1. Alzheimer's Association of America, 2018 AD Facts & Figures.
2. PhRMA. Biopharmaceuticals In Perspective, Spring 2016. Rare diseases are those that affect 200,000 or fewer people in the United States.
3. Credit Suisse US. Earnings Brief, November 2019.
   

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