The Pandemic Accelerated Healthcare Innovation, and It's Just The Beginning.

We take a long-term view of the future of healthcare innovation.

Rewind back to March 2020. The WHO has just declared COVID-19 a global pandemic. When you check your investments, you see that your portfolio’s value has plunged. But, healthcare stocks would soon emerge as pandemic winners. And by November 2020, positive vaccine trials would send Pfizer’s share price soaring.

Today, more than half of the world’s population is fully vaccinated, and economies are learning to live with the virus. But does that mean investors should forget about healthcare stocks? If you look at the big picture, you’ll see that the pandemic accelerated healthcare innovation, and it’s not abating any time soon. Here’s why:

Healthcare technologies are on the cusp of exponential growth

First, here’s some background on the sector. The healthcare space has traditionally been slow to adopt new technologies, and for good reason. A software glitch can have adverse outcomes in the healthcare environment, where data privacy, accuracy, and lives are paramount. But the COVID-19 pandemic has shown the potential for healthcare innovation to transform the world and companies to quickly and safely bring them to market.

If you look at the technology S-curve below, which shows the typical adoption path of breakthrough technologies, you’ll see technologies in the “innovators” and “early adopters” stages include those related to genomics, telemedicine, and digital health. These technologies can range from consumer products like home DNA test kits to augmented reality for remote surgeries. Their position early in the curve means that they’re still on the cusp of exponential growth.

Longer-term forces are driving healthcare’s transformation

COVID-19 has accelerated the adoption of certain healthcare technologies, with mRNA vaccines and telehealth being among the most notable. But that’s not all. If we look at the long term, we see that greater shifts in the global economy will become even bigger drivers of transformation.

Here are some of the structural trends that we see driving change in the space:

World populations are ageing faster and living longer

Advances in medicine and public health are extending our lifespans. The United Nations projects that people aged 65 years or over will double to 1.5 billion by 2050, up from 728 million people in 2020. It also projects that the average life expectancy for a person born in 2020 is 73 years, up from about 62 years in 1980.

An aging population means that there'll be a greater need for disease prevention, diagnosis, and treatment, pointing to a future increase in healthcare spending. For example, cancer incidents rise with age. But at the same time, advances in genomics have resulted in better screening tools and targeted therapeutics that are less harsh than traditional methods like chemotherapy. In fact, the oncology market could reach $250 billion in revenue in 2024 from $143 billion in 2019, or a compound annual growth rate (CAGR) of 12%.

Emerging market healthcare demand is growing

Emerging markets are growing and developing, and that's driving demand for healthcare. More than 6 billion people, or 80% of the world's population, make up these markets. And as these societies become richer and adopt more sedentary lifestyles in cities, diseases like diabetes and obesity tend to increase.

Government regulations are also driving this demand. For example, China's National Health Commission has set targets to increase the healthcare market size to 16 trillion yuan ($2.5 trillion USD) by 2030, double where it stands today.

Shifting consumer behaviours will push firms to innovate faster

COVID-19 has sped up the innovation process, such as in the rise of digital healthcare services worldwide. Consumer expectations and healthcare providers' attitudes have also shifted, helping to enable regulatory changes and drive investment into the space.

These shifts could eventually boost the market size of the virtual care industry to $250 billion USD. As innovative technologies become more widespread, they can also become cheaper and scale faster.

Keep a long term view when investing in healthcare

The structural trends indicate that healthcare innovation will likely grow exponentially over the long term. But, it's important to remember that the sector isn't immune to short-term dynamics, such as the recently-signalled interest rate hikes. Higher interest rates mean higher borrowing costs, which lowers companies' earnings potential and, in turn, their intrinsic value.

Our Healthcare Innovation portfolio – which we launched in October of last year as part of our first batch of thematic portfolios – isn't immune to these short-term dynamics. But given the structural drivers supporting the healthcare sector, you shouldn't worry about short-term volatility, provided you take a long-term view. If the sector underperforms in the near term, some could even see this as an opportunity to buy healthcare innovation stocks at a lower price. So keep that in mind during this latest period of heart-stopping market volatility — for your own health's sake.

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