The healthcare sector continues to be an attractive investment area despite the periodic noisy headlines and some bouts of volatility. Today, this sector represents approximately 18% of the United States’ GDP, at $4.5 trillion in annual spending, while claiming roughly one out of every six dollars spent in the economy. However, it is not just large—it is durable, innovation-driven and appealing to investors. Further, investors participating in this segment of the economy may benefit from its defensive characteristics—because the sector is generally less sensitive to economic downturns—as well as from company-specific drivers of growth and value, and often explosive growth potential.

Stability in Healthcare

At a time when macro elements such as inflation, interest rates and elevated prices for goods and services are exerting pressure on consumers’ wallets, the largely non-discretionary nature of healthcare consumption and spending provide an important element of stability. Aging populations throughout the world, coupled with increasing chronic disease incidences (e.g., diabetes, obesity, cardiovascular disease and cancer), are setting the stage for long duration treatments and recurring revenue streams from procedures, monitoring, diagnostics and therapeutics.

The sector also enjoys strong pricing power, especially in the U.S. Insurance coverage insulates the customer from immediate volatile spikes in costs, while allowing manufacturers to implement low to mid-single digit price increases based on volume negotiations with insurance carriers. One exception to this healthcare pricing trend appears to be with highly commoditized areas such as orthopedics.

Innovation is Key

Unlike most other sectors, healthcare benefits directly from innovation, resulting in new and expanding addressable markets for conditions that were previously untreatable. For example, over the past two years or so, we have witnessed multi-billion-dollar markets created with new drug classes such as GLP1s, immune-oncology and gene therapy—all of which extend life, improve quality of life and address previously unmet needs.

Policy Landscape More Favorable

Considering the uncertain policy landscape, we feel comfortable that elevated risk due to drug price negotiations under the Most Favored Nation (MFN) pricing and the Inflation Reduction Act (IRA) has been largely addressed, and the next three years are expected to be a more stable policy environment. Large Pharma companies are building U.S. manufacturing capacity to help increase domestic production and the MFN will likely have European market drug pricing rise and eventually converge toward U.S. levels over a 10-year horizon. Furthermore, MFN policy clarity should boost confidence by management and drive them to pursue mergers and acquisitions activity.

China’s Emergence Could Accelerate Early-Stage Development

As always, there are key factors that an experienced investor in the healthcare sector needs to monitor, such as Chinese partnerships in R&D strategy. We view China’s emergence as a major player in faster, early-stage drug development as a net positive, or at least as a neutral element, for global pharma and biotech companies. For instance, China can expedite early-stage drug development by running basket trials of one drug across multiple indications—such as cancer types—thereby substantially speeding up Phase 1 data generation. Consequently, large pharma/biotech companies can have a stronger conviction to invest more than $1 billion in expansive Phase 3 studies. We also anticipate AI applications in U.S. drug discovery/development should help truncate pre-clinical cycles. Moreover, we believe first-in-class, differentiated U.S. assets (i.e., products or companies) will remain highly valuable to companies looking to acquire these assets, and as stand-alone stories.

Outlook

Healthcare is among the most vital and innovative sectors in today’s investment landscape. As such, it entails a host of promising avenues, but some cul-de-sacs, too. Navigating this exciting and complex field requires an experienced, sector-focused investor who is able to discern promising early and durable opportunities from less viable or declining ones. This investor also needs to balance exposure to different therapeutic categories, while differentiating between robust current growth versus potential future growth.

Ultimately, the benefits from successful investment in the healthcare sector have the potential to be extremely rewarding to investors who bring the requisite expertise, patience and discipline to navigating this dynamic segment of the economy.  

Duygu Akyatan is Executive Vice President, Equity Portfolio Manager at Mutual of America Capital Management LLC.

The views expressed in this article are subject to change at any time based on market and other conditions and should not be construed as a recommendation. This article contains forward-looking statements, which speak only as of the date they were made and involve risks and uncertainties that could cause actual results to differ materially from those expressed herein. Readers are cautioned not to rely on our forward-looking statements.

The information has been provided as a general market commentary only and does not constitute legal, tax, accounting, other professional counsel or investment advice, is not predictive of future performance, and should not be construed as an offer to sell or a solicitation to buy any security or make an offer where otherwise unlawful. The information has been provided without taking into account the investment objective, financial situation or needs of any particular person. Mutual of America is not responsible for any subsequent investment advice given based on the information supplied.

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