Global equity markets posted positive gains throughout most of 2024 with the main trend appearing to be a rotation into some of the more economically sensitive areas of the market such as information technology and communication services.

Comparatively, healthcare really struggled and underperformed the broader market, as it did in 2023. Not only has the macroeconomic environment favoured more cyclical sectors, the US political situation has added further short-term uncertainty following a Republican clean-sweep and confirmation of Donald Trump as the 47^th US President. In isolation, this is not hugely disconcerting for the healthcare industry, but when he announced Robert F Kennedy, Jr (RFK) as his nominee to run the Department of Health and Human Services, he introduced a greater level of uncertainty for healthcare investors given some of RFK’s public comments against vaccines, especially COVID-19 vaccines and fluoride in water.

Importantly, however, the sector’s fundamentals appear to be in rude health, as illustrated by high levels of innovation, new product cycles driving dynamic growth and ongoing demand for healthcare products and services. Valuations are also extremely attractive for the earnings growth forecast on offer.

Fundamentals: Innovating, adopting new technologies and delivering growth

The healthcare industry is highly innovative, is adopting cutting-edge technologies and is focused on addressing high unmet medical needs, in parallel with trying to satisfy the ever-growing demand for much-needed products and services. Using FDA data as a proxy, a steadily improving cadence of new drug approvals in recent years underpins the idea that the industry is generating positive outcomes from its R&D investments. Ground-breaking breakthroughs in areas of high unmet needs such as obesity, irregular heart rhythm, Alzheimer’s disease and smoker’s cough not only offer patients hope, but also present attractive, commercial opportunities for the participants.

Diagnostics is also an area where artificial intelligence and machine learning could make a real difference, especially in areas such as colonoscopy and ultrasound.

The adoption of new technologies is also evident, as healthcare systems globally look to generate much-needed efficiencies to be able to deliver more healthcare to more people without compromising quality of care –  this is where artificial intelligence (AI) and machine learning (ML) can play a vital role. On the services side, key areas include the ability to automate coding and billing in hospitals, improving the efficiency of revenue cycle management and helping prevent fraud. Diagnostics is also an area where AI and ML could make a real difference, especially in areas such as colonoscopy and ultrasound.

Access: Is innovation without access truly innovative?

Access and affordability are critical for both societal good and the sustainability of healthcare systems. After all, generic drugs and biosimilars account for c90% of all US prescriptions but represent only 13% of spending, offering clear evidence of the value that low-cost, high-quality medicines bring to patients, healthcare systems and government budgets alike. With materially lower prices, more and more patients can access medications that would previously have been prohibitively expensive. As such, it is imperative that regulators and manufacturers continue to work together to ensure the long-term sustainability for the generics and biosimilars industry.

Conclusion: Dislocated from fundamentals

Healthcare is heavily out of favour, as illustrated by recent ETF outflows, depressed valuations and low investor appetite, yet the sector has multiple tailwinds that are both dynamic and durable. In the near term, exciting new product cycles should drive revenue momentum that should translate into attractive earnings and cashflow.

There is also high hope that pipelines could reinvent the shape of companies’ top lines beyond the current wave of new product launches. All this is sitting on top of a number of secular, long-term investment themes that include an ageing population that is developing more and more chronic diseases, emerging markets, prevention, industry consolidation and outsourcing. There will likely be short-term volatility, especially as the new administration in the US establishes itself, but the current investment opportunity is as exciting as it is rare.