Health stocks: What’s driving the demand?

Michael Li
— 1 minute read

A renewed push towards innovation within the global healthcare sector is driving good investment returns, and this may continue as jurisdictions race to find a vaccine for COVID-19.

Michael Li

Healthcare stocks produced strong gains in July, helping the S&P 500 Index end the month in positive territory year-to-date. That’s a remarkable turnaround given the February and March bear market, with massive monetary stimulus from the US Federal Reserve continuing to fund the rally. 

Health stocks led the broader market before finishing just behind the S&P 500 in July. In the healthcare sector, every industry segment performed well except biotechnology, which gave back some of its recent gains in July.

The human cost of the coronavirus pandemic underscores the need for further scientific discovery and also highlights the agility of some healthcare companies to address the crises. And indeed, innovation has been growing at a rapid pace in the healthcare field in recent years. That’s due in part to a more in-depth understanding of the human body after completion of the Human Genome Project, lower genome sequencing costs, and enhanced research and laboratory capabilities.  

There’s a rising demand for healthcare services globally because there are approximately 600 million people worldwide aged 65 years and over. In addition, increasing wealth levels in China and India in particular, underscore the global drive for greater access to healthcare. 

This will place significant stress on healthcare systems, so investment in infrastructure and capacity is required, as well as innovations in treatment and drugs. 

One area of particular interest at present is biotechnology. The combination of innovation, growth, and positive social impact by investing in the industry is significant. Research and development efforts here are strong, and we see product pipelines that suggest growth can be maintained for many years, not just quarters. 

Search for a vaccine – progress and perspective 
Much of the discussion suggests an effective vaccine is imminent and will soon be available to eradicate the disease. And it is true that the World Health Organisation reports that more than 140 potential vaccines are in development as of late July, with five having entered later-stage, large-scale clinical trials to determine safety and efficacy. 

But while hopes are high that a safe, effective vaccine can be identified quickly, we caution that it will be many months at the very least before we see an approved vaccine being distributed in large quantities. Consider that vaccines typically undergo many years of testing to validate efficacy and show that benefits outweigh the risks and potential side effects. 

In the US, Scott Gottlieb, a former commissioner at the US Food and Drug Administration, has suggested the best hope for a treatment may come from antibodies derived from infected lab animals. Regeneron Pharmaceutical’s antibody cocktail is among the most promising of these potential treatments. The company’s antibody approach yielded a treatment for Ebola that was considered best in class. Regeneron’s drug cocktail entered phase 3 clinical trials in July. 

Regeneron recently announced a deal with the US government to support its antibody cocktail research and production, with the government assuming responsibility for distribution. Moreover, the company has ramped up its manufacturing capacity in anticipation of the approval of its drug cocktail, so that it can rapidly produce the drug in large quantities.

Regeneron is a good example of investing for social impact and also financial return. It is a leading biotechnology company with a history of strong innovation and research. In social impact terms, the company is working on new and innovative treatments for diseases, and providing access to medicines and services in both developed and emerging markets.  

Sector outlook strong
While much of the focus in the sector is on work toward treatment and prevention of COVID-19, the broader fundamental outlook for the sector remains relatively strong. 

Stocks within the healthcare sector have historically outperformed the market by almost 2 per cent on average (31/8/1996 to 30/6/2020), especially during periods when macro uncertainty is prevalent. When innovation delivers new products and services, it tends to outperform, and the current environment is especially conducive to innovation.

The healthcare sector is currently trading at a discount to both the broader market and its usual valuation so on that basis, the sector is quite attractive. In addition, investors are starting to recognise the value of innovation and agility presented by many healthcare companies.

Michael Li, senior portfolio manager, American Century Investments


Health stocks: What’s driving the demand?
Michael Li
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