The Covid-19 pandemic has put the healthcare sector front and centre. We continue to hold a positive view on the sector as it offers investors access to long-term growth while providing stable returns in times of economic uncertainties.
- Chloe Nadia Halim|Published on Jun 21, 2021
- The healthcare sector presents great balance between growth and stability, providing a buffer to general market volatility while still producing impressive organic growth.
- Covid-19’s global grip is likely to extend beyond 2021 as the road to recovery has not been smooth sailing.
- There is likely to be a persistent need for breakthroughs in Covid-19 treatments and vaccines well beyond 2021, and this would benefit biopharmaceutical companies.
- Earnings for the healthcare sector are supported by secular trends such as an ageing population, and a growing healthcare expenditure.
- Innovation will be a key driver of the healthcare sector’s growth, as companies come up with cutting edge technologies and treatments to meet patients’ medical needs.
- We maintain a 3.0 Stars “Attractive” rating for the healthcare sector. Based on our estimations, the industry has an upside potential of 6.1% in 2022 and 13.8% in 2023.
This is an exciting time for the healthcare sector. The sector has taken on a leading role in the battle against Covid-19, developing therapies and vaccines to combat the virus, saving the lives of millions around the world.
Additionally, while global equities collapsed in March last year, the healthcare sector – though not spared from losses – outperformed most other areas of the market, proving its resiliency during times of crisis (Figure 1).
Figure 1: Defensive characteristics of the healthcare sector
Persistent need for breakthroughs in Covid-19 vaccines and treatments
The early vaccine efficacy data proved promising, flooding the market with optimism late last year. However, as we all realised later, the road to recovery has not been smooth sailing.
The slow pace of vaccinations and the rapid emergence of new variants likely means that Covid-19 is here to stay, with the global number of cases exceeding 178 million as of 21 June 2021 (Figure 2).
Figure 2: Number of Covid-19 cases globally
The difficulty in dealing with this pandemic arises from the fact that the Covid-19 virus mutates and changes. This raises the possibility that there is a need to keep tinkering with vaccines to keep up with the virus, as it continually alters its antigenic profile.
Additionally, there have been concerns that the current vaccines (Figure 3) do not confer adequate levels of protection against new variants, and thus the development of “booster” versions of the vaccines may be necessary.
Figure 3: Estimated effectiveness of Covid-19 vaccines based on late-stage clinical trials data
With this in mind, there is likely to be a persistent need for breakthroughs in Covid-19 vaccines and treatments well beyond 2021. Henceforth, we think that several biopharmaceutical companies with market leading Covid-19 vaccines and therapeutic portfolios warrants investors’ attention, as they are expected to see consistently strong demand over the next few years.
For instance, Pfizer (NYSE:PFE) expects the Covid-19 vaccine to be a major revenue contributor for years, and has forecast sales of USD 26 billion from the shot in 2021. In fact, the global spending on Covid-19 vaccines and booster shots could total USD 157 billion through 2025.
Secular trends continue to drive the demand for healthcare services
However even beyond Covid-19, there is no denying that the demand for healthcare services is set to grow over the medium to long-term.
The healthcare sector is underpinned by strong secular growth trends; in particular, demographic changes arising from an ageing population and an increasing healthcare expenditure.
Figure 4: Percentage of population aged 65 years and above
Globally, life expectancy has increased by more than 6 years between 2000 and 2019 – from 67 years in 2000 to 73 years in 2019. A longer life expectancy coupled with a declining birth rate, has resulted in the proportion of elderly significantly increasing all around the world (Figure 4).
The UN estimates that 2050, more than one-fifth of the world’s population will be aged 60 or above. And as a population ages, its healthcare needs increase in tandem, leading to an increase in global healthcare spending.
In fact, the global healthcare spending is expected to increase at a 3.9% compound annual growth rate (CAGR) between 2020 and 2024, considerably faster than the 2.8% recorded in 2015 – 2019. We can expect the earnings of the global healthcare sector to trend upwards, together with an increase in healthcare spending.
Continued innovation in the healthcare sector to drive growth
Innovation has long been a driver within the healthcare space, but since the onset of the Covid-19 pandemic, the sector has witnessed an unprecedented acceleration in innovation.
In particular, the pandemic has accelerated innovation, in the areas of telemedicine and remote care, which saw tremendous demand as social-distancing measures severely curtailed the access to hospitals and clinics.
Increasingly, hospitals and physicians are investing in telehealth capabilities, and consumers are becoming more receptive to this model of care. We see this in the increasing adoption of telehealth services, from just 11% of consumers using it in 2019 to 46% as of April 2020.
Unsurprisingly, the global telemedicine market is projected to grow at CAGR of 22% from 2019 to 2030 to reach USD 459.8 billion by 2030 (Figure 5), and we foresee ample room for further adoption and innovation in the telemedicine space.
Figure 5: Projected global telemedicine market size
Moreover, in the biotechnology space, the industry is benefitting from decades of genomics research, which enables a better understanding of the causes of diseases. This has led to innovations in gene manipulation such as next-generation RNAi therapies, and we are already reaping the benefits of mRNA delivery of some of the Covid-19 vaccines.
Another example of how we are benefiting from decades of genomics research, is in the area of cancer therapy, where next generation chemotherapy treatments, namely antibody drug conjugate technologies (ADCs) are being developed (Figure 6).
Figure 6: Use of antibody-drug conjugates to treat cancer
This approach enhances the effectiveness of the treatment while lowering potential adverse effects on healthy cells, which have always been a major issue for traditional chemotherapy treatments.
To date, ten antibody-drug conjugates have received market approval and nearly 100 investigational ADCs are currently in pre-clinical and clinical trials. This exciting technology, among others, will bring about a new wave of treatments for cancers, autoimmune diseases, and genetic diseases, creating many monetisation opportunities for biotechnology companies in time to come.
All in all, for growth to exist, innovation must be able to thrive. Innovation in the areas of telemedicine and genomics research are key growth engines that have emerged from the healthcare sector.
Maintaining our 3 Stars “Attractive” rating for the healthcare sector
Even though share prices of healthcare companies have risen by a fair bit since our last update, we believe that valuations are still attractive, due to the strong expected earnings growth that lie ahead (Table 1).
As such, we have decided to maintain the global healthcare sector at a rating of 3.0 Stars “Attractive”. Based on our estimates, investors can look forward to an upside potential 13.8% by end 2023. Investors can also expect a dividend yield of about 1.3% per annum.
Figure 7: Valuations of healthcare companies
To take part in the growth of the global healthcare sector, our preferred ETF is the iShares Global Healthcare (NYSE:IXJ), which provides exposure to a basket of pharmaceutical, biotechnology, and medical device companies across the world.
Investors may also consider the Blackrock World Healthscience A2 USD unit trust if they prefer to gain exposure to the global healthcare sector through an active approach.
All in all, the healthcare sector is unique in the sense that it offers investors access to long-term growth while providing stable returns in times of economic uncertainties. Moreover, the secular growth trends and product innovation underpinning this sector are key reasons why it deserves a place in investors’ long-term portfolios.