Written by Caroline Langley, deputy manager of the Quilter Cheviot Climate Assets funds
Warren Buffett once said that “the best investment you can make is in yourself”. Clearly healthcare is fundamentally important in achieving that, and we are seeing consumers and nations prioritise health spending like never before.
Healthcare is one of the largest global expenses – estimated at $9 trillion in 2021 – and the amount has been consistently rising, both in absolute and per-capita terms. This increasing demand is largely explained by demographic factors, with the population both growing and ageing.
By 2050, it is estimated that one in six people in the world will be aged over 65, and this ratio may be as high as one in four in the UK. Other trends are also coalescing to further strain healthcare systems. For example, obesity levels continue to rise in the developed world, leading to diverse health complications, as do levels of pollution.
The task to meet these ever-increasing challenges is vast and requires huge investment.
Much has been made to date about the impact of Novo Nordisk’s Wegovy and Ozempic and Eli Lilly’s Zepbound and Mounjaro products for treating obesity and diabetes. Both companies’ share price performance in the last year as a result of the demand has been staggering.
Some 25,000 Americans are signing up for Wegovy every week. So great is the demand for Wegovy, that Novo Nordisk has been struggling to keep up, needing to increase its supply capacity.
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However, not all of healthcare has been so fruitful for investors recently. Companies in the medical technology and life science sub-sectors have struggled as a result of post-Covid normalisation, demand returning to more recognised levels and funding hard to come by for biotech projects due to higher interest rates.
These pressures are abating, but at a slower speed than many would like. For investors, however, this does not mean the opportunity in healthcare has either passed or is not presently there.
The whole healthcare sector has the potential to be an artificial intelligence winner in the long-term, while still providing investors with the traditional defensive characteristics they have become accustomed to.
Simply put, AI has countless potential in the hospital, at home and in the clinical trial process. It has the ability to help streamline processes, improve research and development, improve data quality, automate repetitive tasks and help drive patient engagement. It can benefit the sector by offering efficiency benefits and the ability to make more informed decisions.
Take the development of a new drug as an example. The time spent researching, manufacturing, testing and bringing a new drug to market can take 10 years or more. Even then, a drug has a less than 10% possibility of making it from a phase I clinical trial to market.
Discovering and developing a drug is a complex process so the efficiency gains and drug target identification from AI could be very significant and potentially identify targets that were previously thought undruggable.
Clearly there will need to be important guardrails in place to ensure patient safety is prioritised. But AI can help make healthcare more proactive rather than reactive.
It extends beyond pharmaceutical use cases too. Medical imaging, for example, is an area well suited for AI as it contains huge amounts of data and can really help with image recognition and highlighting any abnormalities. The possibilities are nigh on endless, and as healthcare becomes more personalised, new solutions and increased supply gives an investor the opportunity to participate in that success.
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The fundamental outlook in healthcare is supportive with the growing and ageing population, patient volumes still elevated, some of the headwinds that impacted the tools sub-sector abating and innovation continuing to be a focus. With a boost from AI over the long-term, the future looks bright.
This is not to say there are challenges remaining in the sector. In pharmaceuticals, there are a variety of clinical trial readouts expected none of which provide certainty of success. Furthermore, there is some litigation creating an overhang on some pharmaceutical stocks and with the US election coming up there could be some volatility given drug pricing is often a focus within campaigns.
But in the round, and especially for a sustainable investor, those challenges can be overcome thanks to the potential and criticality healthcare provides. Innovation and bringing new technologies and therapies to market helps drive change, efficiency and create opportunities which should help drive change and growth in the sector.
