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- This combination of innovation and ageing populations is creating a positive feedback loop for growth.
- In past U.S. election cycles, healthcare stocks have often underperformed as investors speculate how healthcare policy might change under a new president. What is in store for this election?
- A growing number of secular tailwinds are gathering strength in the healthcare sector with three major focuses.
This article was syndicated by Endowus in partnership with Janus Henderson Investors.
With populations in large economies quickly ageing, demand for healthcare is set to rise rapidly over the coming decades. By 2050, one in six people worldwide will be 65 or older – an age cohort that typically spends three times as much on medical services as younger generations and a pattern that stands in contrast to other consumption categories that tend to decline as people age.
By 2050, one in six people worldwide will be 65 or older.
While the healthcare sector overall could benefit from greying populations, some of the biggest growth opportunities could occur in the innovations that target age-related conditions (i.e., Alzheimer’s, cardiovascular disease, cancer, and orthopaedics). In our view, focusing on these growth areas – and the small- and mid-size companies driving the innovation within each – could help investors make the most of the demographic tailwind in healthcare.
Innovation in healthcare led by smaller companies
Populations are ageing just as advancements in medical science and supportive regulations are driving a boom in new treatments. Over the last two decades, the number of drugs approved by the U.S. Food and Drug Administration (FDA) has increased 100%, with a record 73 novel medicines greenlighted in 2023.
Exhibit 1: Accelerating innovation in medicine
FDA-approved drugs
Among these breakthroughs are the first drug that can actually modify the course of Alzheimer’s disease and the first vaccines to prevent respiratory syncytial virus (RSV) in people aged 60 and over. RSV can be particularly dangerous for seniors and infants, making these new treatments especially important.
Many of these medicines were developed by small- and mid-cap companies. In fact, “emerging” biopharma firms are now responsible for 65% of molecules in the research and development (R&D) pipeline, up from roughly one-third in 2001. And over the last decade, the number of products filed for regulatory approval by emerging biopharma has increased fourfold.
The development of medical devices, life sciences tools, and drug manufacturing has seen a similar trend, as smaller companies are aggressively investing in research and development to capture high gross margins and rapid innovation. These breakthroughs include advanced genomic sequencing, robotic surgery, and high-energy shock waves for blocked blood vessels, to name a few.
How does innovation align with the reality?
This combination of innovation and ageing populations is creating a positive feedback loop for growth. For instance, as surgical techniques have gotten better with the aid of robotics and other devices, outcomes have improved, driving more patients to opt for surgery – all as the pool of patients needing surgery continues to grow.
Innovation + ageing = growth opportunities.
A case study of Japan
In Japan – a super-aging society, where roughly 30% of the population is age 65 and older and one in 10 people is at least 80 – the number of spinal surgeries has more than doubled since 2003, with the elderly making up a greater percentage of procedures.
Japan’s ageing population drives demand for medical services
Similar growth opportunities exist in novel drugs. Consider Alzheimer’s: More than 55 million people worldwide have dementia, with nearly 10 million new cases diagnosed each year.
Alzheimer’s is the most common type of dementia, and for decades, no new treatments were made available to patients. That changed in 2023 when the FDA granted full approval to Leqembi, the first drug to slow the progression of cognitive decline. A second drug is expected to launch this year, and we remain hopeful for further innovation in the space as companies and regulators see the growing unmet medical need.
These and other advanced drugs increasingly take the form of biologics – large molecules that are produced using a living system, such as a microorganism or animal cell.
Given the difficulty of manufacturing these drugs to a consistently high standard, biopharma companies are seeking the help of contract development and manufacturing organisations (CDMOs) – third-party firms that support biopharmaceuticals throughout all stages of drug development and manufacturing. The CDMO industry is forecast to grow by more than 7% annually through the end of the decade, thanks in large part to demand from small- and mid-cap biopharma companies, which often lack the manufacturing capabilities of bigger peers.
Minimising downside risk
Such growth rates can translate to big returns for investors, but the inherent difficulty of developing and commercialising new therapeutics also poses significant risks.
In biotech, for example, 90% of molecules that enter human clinical trials will never make it to market. Among therapies that do launch, our experience has found that Wall Street analysts either under- or overestimate a drug’s market opportunity 90% of the time. In addition, companies are subject to the whims of legislation and dependent on securing funding for R&D.
As a result, investors may benefit from a more active approach to investing in small and mid-cap healthcare. Understanding both the science and commercial opportunities of new products could help reduce the wide disparity of stock returns the sector has historically experienced. It could also help investors navigate through near-term noise.
Healthcare has the biggest disparity between winners and losers
10-year average return of top/bottom 5 stocks
The bigger story – secular growth trends in an election year
In past U.S. election cycles, healthcare stocks have often underperformed as investors speculate how healthcare policy might change under a new president. That is not the case so far this year. In fact, the S&P 500 Health Care Sector has been largely keeping pace with the broader equity market, returning 8.9% year to date, compared with 10.6% for the S&P 500 Index.
What’s different about the 2024 election? Both candidates have already been president – a rare occurrence in U.S. election history (the last instance was over 100 years ago in 1912, when former president Teddy Roosevelt ran against his successor, William Howard Taft). As such, investors seemingly have opted to focus on the candidates’ track records on healthcare reform, rather than campaign rhetoric.
But in the end, the biggest healthcare story of 2024 might not be politics at all. Markets instead may focus on a growing number of secular tailwinds that are gathering strength in the sector. Here are three potential focal points:
- Ageing demographics
By 2050, one in six people worldwide will be 65 or older – an age cohort that typically spends three times as much on medical services as the younger generations, and in the U.S., more than 10,000 people now turn 65 every day.
- Valuations
After a year of working through imbalances created by COVID-19, healthcare stocks began 2024 trading at a discount to the broader market. This valuation gap could help limit the downside of negative shocks (including political ones) and has helped kick off a flurry of mergers and acquisitions, including 22 deals in 2023 each worth more than US$1 billion, representing a new record.
- Innovation
Given the strong line-up of medicine approval in 2023, these drugs represent new product cycles that could drive growth for 10 years or longer. What’s more, many address large disease categories, such as Alzheimer’s, immunology, cancer, and diabetes. Not to mention obesity – the new class of weight-loss drugs known as GLP-1s is proving so popular that the therapies could top $100 billion in sales before the end of the decade. Even with widely different payor systems around the world, we’ve found true innovation is usually rewarded regardless of politics.
With those kinds of tailwinds, it may be no wonder investors are taking the long view this election year.
About Janus Henderson Investors
Janus Henderson Group is a leading global active asset manager dedicated to helping clients define and achieve superior financial outcomes through differentiated insights, disciplined investments, and world-class service.
As of March 31, 2024, Janus Henderson had approximately US$353 billion in assets under management, more than 2,000 employees, and offices in 24 cities worldwide. The firm helps millions of people globally invest in a brighter future together. Headquartered in London, Janus Henderson is listed on the New York Stock Exchange (NYSE).
Endowus has five funds from Janus Henderson Investors (as of 30 May 2024), including the Janus Henderson Horizon Biotechnology Fund and Global Life Sciences Fund. Get started building your own portfolio with these funds on the Endowus Fund Smart platform.
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- Population: United Nations, December 2019. Healthcare spending: JAMA Network, “Comparison of Health Care Spending by Age in 8 High-Income Countries,” 6 August 2020. Data reflect 2015 figures for Australia, Canada, Germany, Japan, the Netherlands, Switzerland, the UK and the U.S.
- “Emerging Biopharma’s Contribution to Innovation,” IQVIA, 31 June 2022. Data as of 31 December 2021.
- “Trends in the numbers of spine surgeries and spine surgeons over the past 15 years,” Kazuyoshi Kobayashi, Et al., Nagoya Journal of Medical Science, February 2022.
- World Health Organization, as of 15 March 2023.
- The Growing CDMO Market: 5 Trends Shaping the Industry,” ICQ, 9 March 2023. Source: https://www.janushenderson.com/en-hk/investor/article/why-healthcare-stocks-could-catch-a-break-this-election-year/; https://www.janushenderson.com/en-hk/investor/article/healthcares-small-and-mid-cap-opportunities-amid-aging-populations/
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