Healthcare is a sector where innovation is flourishing under the radar and the implications are global. In the last 10 years since our team joined Nikko Asset Management, we have seen time and time again that we are in a fast-evolving landscape with a number of significant structural changes that are going to significantly shift the flow of capital and innovation within the sector.
Amid this shift, the providers and enablers of healthcare efficiency are well-positioned to reward investors.
With an aging global population, providing sufficient and efficient healthcare, and reducing the cost of these services, is one of the most important challenges going forward. Following are three catalysts expected to shape the industry and future investment returns at this critical inflection point.
Rapid innovation
The pace of innovation in healthcare is rapid. In 2023, the U.S. Food and Drug Administration (FDA) approved 55 novel drugs, the second-highest figure in the last 30 years and a nearly 50% increase compared to 2022. New healthcare models are being developed all the time and artificial intelligence will likely take a major role in healthcare in the fullness of time.
The healthcare sector is particularly well-placed to offer solutions to the very pressing demographic challenges faced by society over the coming decades, such as aging populations and the accompanying rise in chronic disease that will place a huge financial burden on governments worldwide.
Faster, more accurate diagnoses will be a crucial element in the response to these challenges. Faster diagnoses mean faster medical intervention which significantly improves the patient’s chance of a cure. AI likely has a significant role to play here, and Siemens Healthineers is widely recognized as being one of the global leaders in its deployment in medical imaging and treatment planning.
COVID-19 supercharged healthcare investment
In reality, the enormous amount of funding that flowed into healthcare innovation during the pandemic, alongside the unusual permission to move fast and break things — an adage that is normally reserved for the technology rather than the more risk-averse healthcare sector — ushered through significant healthcare developments in a matter of months that would have taken decades to achieve in normal times.
These rapid, but impactful, achievements included the development of COVID vaccines (messenger RNA technology in particular), the building out of manufacturing capacity to make them available to the world and providing the cold-chain storage that made possible the transportation conditions required by some of these vaccines.
As new strains evolved, the industry responded with the faster identification of these mutations and, thanks to the ongoing development of genomics databases, the industry was able to quickly recognize which new parts of the virus needed to be attacked by the vaccines to ensure efficacy.
Gene therapies, and some of the more personalized medicines now being trialed, can provide medical professionals with a better understanding of why some people respond to certain medicines differently and more positively than others.
Bio-Techne has been a leading provider of research reagents for almost 40 years. These are the fundamental building blocks for almost all of the innovation noted above. Over the years, the company has expanded into increasingly complex molecules and the tools needed to measure their efficacy — making them uniquely well placed to fully participate in the delivery of these life-saving innovations.
AI-driven transformation and cost efficiency
We are also just at the emergence of witnessing the impacts artificial intelligence and digital pathology will have on the sector. AI is already being harnessed to deliver better diagnostic imaging and treatment recommendations, the earlier detection of diseases such as cancer, as well as the faster identification of molecules that could lead to the development of even more new medicines.
The application of artificial intelligence within healthcare is only beginning so the scope for future transformation is high. As of August 2024, the U.S. Food & Drug Administration had already approved 950 AI/machine learning-enabled medical devices, and the rate of approvals is accelerating.
Although radiology has been the leading field for approvals so far, these benefits will ultimately accrue across an enormous range of applications. Practical examples are already yielding savings, such as faster laboratory characterization of the new molecules with the greatest chance of success and better designed clinical trials — required to prove their efficacy and safety. Furthermore, with the U.S. healthcare system spending between 15% and 25% of its budget on administration, it is little wonder that healthcare payers are beginning to invest heavily in AI-related solutions in this area, harnessing the power of data.
Better collection, aggregation and analysis of data is increasingly allowing us to bend the healthcare cost curve, by enabling better designed treatment plans and channeling the delivery of care to the most appropriate site. In many cases, this is turning out to not be the traditional general hospital setting, with care in the patient’s own home and in specialist facilities both gaining ground. The pivot towards value-based care (and away from older, fee-for-service care delivery models) has the potential to unlock up to 20% cost savings, while also delivering better patient outcomes.
Encompass Health has long recognized the need to demonstrate the value of the care that they deliver and have invested heavily in the IT architecture necessary to collect the data for this. This is allowing them to prove the value of their care to hospital discharge planners and government payers alike. This is leading to market share expansion and positive reimbursement.
Given the stakes, change tends to happen more slowly in healthcare than in other sectors. However, the changes underway at present in this sector are profound. For investors looking to enhance the diversification of their portfolios, this is the time to revisit healthcare stocks.
Greig Bryson is a portfolio manager at Nikko Asset Management. He was previously investment director at Scottish Widows Investment Partnership, managing European and U.K. allocations for institutional and retail clients. In 2014, Nikko created a global equities team with the hire of several investment professionals from SWIP, which included Bryson. He is based in Edinburgh. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I’s editorial team.
