We are leaving behind an era of monetary experimentation and entering the fiscal age. Government liabilities are set to explode in the years ahead driven by ageing societies, shrinking labour forces and rising inequality.
These liabilities will likely be funded through fiscal means. Modern monetary theory in practice, if not in name.
Healthcare systems and social security programmes will face immense strain as the cost of care outpaces gross domestic product and tax receipts. In the US alone, Medicare coverage is expected to grow from $900bn (£708.3bn) in 2024 to $1.75trn in 2034. Healthcare systems in developed economies are too expensive, and in emerging economies they are uneconomic at best.
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If there is one sector that can do with some deflation, it is healthcare. Most people don’t realise that the cost of drugs and medicine is a small portion of overall healthcare costs, typically less than 20%. The majority goes towards hospital care and people. The key is to help patients recover sooner, reducing time spent with physicians and in hospitals.
This creates a tremendous opportunity in life sciences and biotechnology. With the convergence of genomics, robotics and artificial intelligence (AI), we are entering an era of unprecedented innovation and extraordinary transformation. Innovation in areas such as neurology, obesity and oncology are already sparking a resurgence in M&A activity and the IPO market, following the depression of 2022 and 2023.
According to McKinsey & Company and researchers at Harvard, AI could save the US healthcare system up to $360bn annually. Sequencing a genome now costs less than $200, down from $100m just over 20 years ago.
Advances in protein folding by AI models such as DeepMind’s AlphaFold will have vast and transformative consequences, enabling us to better understand diseases like Alzheimer’s and Parkinson’s, identify genetic mutations, speed up drug discovery and enable personalised medicine.
See also: FundCalibre’s McDermott: Anti-obesity drugs will drive healthcare in 2024
Many of the biggest winners over the next decade do not yet exist but opportunities also lie in larger, listed biotechnology and life sciences companies, with existing cashflow streams and proven management ability. The real cherry on the cake is that the sector is trading at valuations below that of the overall market for the first time ever. This in itself should attract investment interest.
Pricing and supply chain risks remain, and with it will come uncertainty and volatility. However, it is clear that active management is key to capturing these opportunities. Investment teams with a strong understanding of the science and target markets, manufacturing and distribution risks, and increasingly complex regulatory environments, will thrive.
The opportunity for long-term, patient investors in the life sciences and biotech space has never been more exciting.
This article originally appeared in the July/August issue of Portfolio Adviser magazine
