A high degree of innovation, heightened levels of utilisation and attractive valuations underpin our conviction that healthcare will be an exciting investment opportunity in 2024. Following a challenging period of relative performance versus the broader market in 2023, driven for the most part by better-than-expected economic conditions that favoured more cyclical investments, the healthcare sector entered 2024 heavily out of favour. While negative ETF flows offer an interesting contrarian signal, it is more the strength of the healthcare industry’s fundamentals that drives our near and medium-term optimism.

Progressive medical advances

While not the exclusive privilege of the biopharmaceutical industry, this subsector of healthcare really has been at the forefront of delivering innovative breakthroughs designed to tackle highly unmet medical needs. Significant progress has been made recently in areas such as Alzheimer’s disease, obesity, early-stage breast cancer, bone marrow cancer, smoker’s cough and hot flushes associated with menopause – and this is by no means an exhaustive list. Not only are these sorts of medical advance hugely significant for patients and healthcare systems alike, the large addressable markets offer the opportunity for companies to drive high levels of revenue and earnings growth for many years to come.

Following the Covid-related nadir, heightened levels of utilisation (patient volumes) could be here to stay as more and more patients access healthcare systems to try and resolve their medical issues. The precise nature of patient backlogs is hard to quantify, but the material volume inflection seen in 2023 is likely to continue into 2024 and possibly beyond. This view is underpinned by the public commentary from healthcare equipment and supplies companies, healthcare facilities and the healthcare insurance industry that provides benefit plans to millions of US citizens. While the uplift in utilisation is broad-based, various pockets within the industry are set to grow faster, driven by durable trends such as shifting patient volumes out of hospitals into outpatient settings, robotic surgery, behavioural health and the continuous monitoring of key indicators of health.

Despite offering attractive, durable growth, the preference for more cyclical parts of the market in 2023 put pressure on healthcare’s price-to-earnings multiples relative to the broader market. This is despite healthcare offering attractive, defensive growth characteristics and the potential for positive revisions driven by new, exciting product cycles. Throw in a relatively benign political environment in the US and the setup for healthcare as an investment opportunity becomes even more compelling.

Investment themes are present across all subsectors. But it is the near-term opportunities that drive investment decisions

Source: Polar Capital, Bloomberg, 29 December 2023.

2023: The winners and losers

On a subsector basis, areas that were exposed to increased utilisation outperformed the healthcare index last year. Healthcare equipment and supplies companies benefitted from improving demand, with many seeing their top lines accelerate in 2023. Healthcare facilities, both inpatient hospitals and surgery centres, were also key beneficiaries of improved patient demand trends during the year.

By contrast, managed care, life sciences tools and services, and pharmaceuticals all struggled. The managed care subsector underperformed, with the key concern being increasing medical costs in the face of the rising consumption of product and services as patients and consumers gain access to care. The challenges facing the life sciences tools and services subsector in 2023 were multi-facetted, including inventory destocking, a slowdown in activity in China and a biopharmaceutical industry that adopted a more conservative approach to R&D investments. Last, but not least, the pharmaceutical industry had a lacklustre year but was heavily bifurcated between the ‘winners’, such as Novo Nordisk and Eli Lilly, and the ‘losers’, such as Pfizer and Roche.

A positive outlook

We remain constructive on biotechnology, healthcare equipment and supplies, and healthcare facilities. Having been out of favour for most of 2023, the biotechnology subsector’s pace of innovation and its appetite to invest in R&D to tackle highly, unmet medical needs remain not just intact but appears to be flourishing. We believe these attributes should ultimately drive value creation for shareholders. Healthcare equipment and supplies, along with healthcare facilities, should continue to experience favourable conditions in 2024 as demand remains elevated. The facilities subsector should also benefit from labour costs and supply pressures easing.

As we look further into 2024, there is a huge amount we are engaging with and are excited about. The demand for healthcare products and services remains strong, cutting-edge innovation is yielding solutions that address hitherto unmet medical needs and the industry continues to consolidate. All this sits on a backdrop where healthcare is heavily out of favour, is attractively valued and is demonstrating an ability to deliver consistently attractive revenue and earnings growth, regardless of the economic, political and regulatory environment. It is these characteristics that fuel our optimism for the year ahead.