Unlocking healthcare’s investment potential

That chart above clearly highlights the stark reality of an ageing population and the healthcare challenges we face. The huge increase in need and future demand, however, is also an opportunity that’s incentivising innovative companies to develop new products and services. And these will be radically beneficial for patients, with more effective treatments for major illnesses already in the pipeline. Care delivery is also transforming, with advances in efficiency and availability allowing people to receive treatment from the comfort of their own home rather than going to hospital as they do now.  

Healthcare markets are complex and cover everything from pharmaceuticals and biotechnology to medical technology and the life science tools required for research, testing and product manufacturing.  That’s why a clear focus on identifying the specific segments exposed to long-term growth trends makes sense, and fundamental analysis is necessary to identify the highest-quality companies that we believe will be able to deliver an attractive return on capital over our investment horizon of 5-10 years.

Following our analysis, our highest conviction lies in companies positioned in one of two categories: technology and more efficient means of delivering care. On the other hand, our view is that the more traditional pharmaceutical companies face many more challenges and external risks that could negatively impact their future earnings.

As technology advances, we are also impressed by some improvements in healthcare delivery, ensuring that patients can conveniently access services at their preferred time and location, at a lower cost to the care provider.  

One leading player we have invested in is ResMed. It offers cloud-connected devices and software to treat breathing conditions like sleep apnea and chronic obstructive pulmonary disorder (COPD), which are often lifestyle-driven diseases (obesity and smoking, respectively). The technology enables patients to receive care at home under medical supervision, reducing hospitalization costs and capacity strain.

Coloplast sells disposable chronic care products primarily to treat ostomates and patients needing continence care, often due to age-related cancers. These products help patients regain and enhance their quality of life while also saving healthcare costs by transitioning care from hospitals to home settings.

We are less positive on the major drug-producing pharmaceutical and biotechnology firms. They are exposed to more risks that could potentially limit their earnings power and make accurately forecasting their future complicated.  These include various regulatory challenges and increased risk of litigation because of product safety concerns or unintended side effects. They are also attracting increasing political scrutiny because of strong historical price increases for limited innovation. In the US, this has resulted in the introduction of the Inflation Reduction Act, which brings direct price controls on drugs sold under Medicare.

The perception that pharmaceutical prices are rising is misleading, however, as net prices have in fact decreased by 3% annually over the past five years (after intermediary rebates)¹.  This trend is expected to worsen. Research and development has become narrowly focused on some common illnesses are areas like oncology, intensifying competition and negatively impacting the industry economics.

That said, we do see potential in speciality pharma and animal health sectors. For example, CSL is as a leading player in biopharmaceuticals, benefiting from regulatory protection in the blood plasma therapeutics business due to historical safety concerns. This barrier to entry reduces patent risks and reimbursement pressures, making the market more attractive.

In the animal health sector, Zoetis and Idexx Laboratories are major players with significant market shares in animal drug and diagnostic markets vital for livestock and pet markets. Compared to traditional human pharma, animal health research is still developing, offering higher returns on research investment with fewer regulatory hurdles - and less competition. This leads to longer product cycles and a more stable pricing environment post-patent expiration, characteristics that we like.