Stock prices in the healthcare sector are on the rise. Innovation is driving growth, and investors appreciate the defensive qualities of the sector, experts say.
After two years of underperformance, the healthcare sector has made a strong start this year. The sector is benefiting from a shift in investor risk appetite, according to Charu Chanana, head of Investment Strategy at Saxo Bank. “As AI stocks cool down and macroeconomic uncertainty increases, investors are focusing on sectors that offer stability, strong cash flow, and reasonable valuations. Healthcare fits that profile with its defensive characteristics, long-term growth potential, and resilience in a recession.”
Chanana also expects the sector to benefit significantly from artificial intelligence. “AI plays a crucial role in drug development and diagnostics, drastically reducing research timelines and costs.” According to her, pharmaceutical companies are using machine learning to analyze vast datasets, enabling them to identify potential new drugs faster than ever before. “AI-assisted diagnostics also improve early disease detection, particularly in cancer and neurological disorders, which could drive substantial growth over the next decade.”
One of the strongest growth trends within the sector is the rise of personalized medicine, says Chanana, where AI and “genomic sequencing” (a technique that determines the complete genetic code of an organism, ed.) make treatments more precise and effective. “Healthcare companies use data to tailor therapies, improving outcomes while reducing costs.” Another driving force is the treatment of chronic diseases such as obesity and metabolic disorders. “The recent success of weight-loss drugs has opened up a multibillion-dollar market, and companies are rushing to expand treatment options,” Chanana added.
Positive side effects
At Mercurius Vermogensbeheer, healthcare has long been a core part of their portfolios, says founder Koen Bender. “Due to its innovative nature. We want to invest in companies that will remain relevant in the future. These are companies strong in innovation and therefore able to influence their own fate,” said Bender. Mercurius uses the AB International Health Care Portfolio fund.
Bender encounters these “relevant companies” not only in the technology sector but also in healthcare. “Healthcare companies can quickly scale up after developing a new drug or medical technology thanks to their platform. Moreover, there is potential for a positive side effect. Consider Eli Lilly and Novo Nordisk, whose diabetes medications have also proven effective against obesity. With a relatively small investment, these companies are now generating significantly higher profits.”
As an additional advantage of investing in healthcare, Bender points to its low correlation with the technology sector. “At their core, these sectors share similar characteristics, but their stock prices do not move simultaneously. For example, our tech sector positions are at a loss this year, but our healthcare positions have yielded strong gains.”
Mark Denham, head of Equities at Carmignac, is also a fan of the sector. He manages the Grande Europe fund, which invests bottom-up in quality companies and has 33 percent allocated to healthcare companies, compared to a 15 percent weighting in the MSCI Europe. “In healthcare, we find all the characteristics we like to see in our investments. These are typically companies with structurally high profitability that reinvest their cash flow into future growth. Additionally, subsectors such as biotech feature young innovative players that may not yet meet our quality standards but could become winners in the future,” said Denham.
Drug price declines
Downward pressure on drug prices and expiring patents have long been headwinds for the sector, but Denham is not overly concerned. “Drug price declines are inherent to the industry and are factored into earnings estimates.” For example, he expects the prices of obesity drugs, such as those from Novo Nordisk, to decline by about 10 percent annually. “This is not a problem because sales volumes are expected to rise much faster.”
Of the major pharmaceutical companies, Grande Europe holds only Novo Nordisk in its portfolio. As a result, the fund is less exposed to expiring patents in the industry, Denham explained. “Pharmaceutical giants are so large that there is always a patent expiring, keeping revenue growth at just three to four percent per year. To simply maintain current revenue levels, major pharmaceutical companies constantly need new blockbuster drugs. That is why we try to avoid those companies. Novo Nordisk is an exception due to the enormous potential of its obesity drug. Without this unique market opportunity, we likely would not hold any major pharmaceutical companies in the portfolio.”
Denham finds companies active in “Life Sciences” more attractive, such as the Swiss Lonza Group, which produces drugs for major pharmaceutical firms. “Medication usage is expected to grow by 12 to 13 percent per year. Large brand manufacturers often outsource drug production to third parties under long-term contracts of up to twenty years.”
Another subsegment the fund focuses on is medical device manufacturers. “We find contact lens company Alcon interesting, as well as the Swiss dental implant maker Straumann and the Danish hearing aid producer Demant.” According to Denham, most innovation occurs within biotech. Unlike in the US, Europe does not have hundreds of biotech companies, but there are still promising stocks to be found, he believes. “Eight years ago, for instance, we invested in Argenx, which was then an unknown biotech company but has since grown into an established player. Thanks to its well-filled pipeline in neurological disorders, its growth potential remains strong. Those who look beyond the beaten path can find even more of these attractive European biotech companies.”