For the first time in history more people globally are dying from obesity related complications than starvation. This reversal highlights the changing landscape of the healthcare sector.
The most treated illnesses are now non-communicable (cancer, diabetes) as opposed to communicable (measles, influenza) and this is where large pharmaceuticals are concentrating. A number of long-term secular trends are set to support the broader healthcare sector, ranging from the growing middle class in emerging markets to the development of new preventative measures to fight varying forms of cancer.
At the initiation of our call on the healthcare sector we believed that there were a number of catalysts that stood to benefit the sector globally in the coming years. These included the diminishing US political headwind, global demographics and immuno-oncology (I-O) innovation.
The US election was a major headwind for global pharmaceuticals as the debate around pricing pressure continued to weigh on the industry. As this is the largest market globally for the pharmaceuticals sector, the outcome was always likely to have a telling effect on the sector. Though Donald Trump continues to tweet about lower prices and increased competition, there appears to be no real appetite among conventional Republican leadership to pressurise the pharmaceutical industry on prices. This is a positive as it will allow for continued concentration on innovation through reinvestment of revenue in research and development.
The other major issue here is the proposal of “repeal and replace” which continues to be delayed due to a lack of buy in from the house. It now looks as though any change is likely to be an adjustment to the current Affordable Care Act (or ‘Obamacare’) as opposed to a replacement. If change is enacted it should free up excess funds to help stimulate the US economy but something needs to be done before midterms as Republican voters are becoming irritated with the lack of progress. Therefore, we expect further noise from Washington in the coming months.
The world is getting older: by 2040 the old age dependency ratio will have risen to 20% with the majority of this aging population based in the developed world. This in turn transfers to greater medical spend in all areas. It is shown that there is a strong correlation historically between rising incomes and healthcare expenditure. The cost of providing healthcare for someone aged 65 and older is 3-5 times higher than for someone younger than 65. The higher percentage of people over this age equals significantly higher spending, signalling a growth catalyst for the sector. According to Deloitte the percentage of global Gross Domestic Product (GDP) spent on healthcare is expected to expand to 10.5% by 2020 with this rise coming from emerging market countries where non-communicable illnesses are becoming more common. Worldwide governments are continuing to put further emphasis on healthcare schemes to deal with the expected burden as life expectancies continue to rise. Investment is likely to increase on preventative measures in a hope to lower the longer-term financial burden.
Outside of increased life expectancy, obesity also continues to be a massive issue globally both in developed and developing markets. In the US almost 70% of adults are considered to be overweight or obese with close to 40% considered obese. In Europe the figures aren’t much better with over 50% of men and women considered overweight. With these rising figures complications related to such afflictions are also rising globally with cases of heart disease and diabetes continuing on an upward trajectory. Now China and India have the largest number of diabetes sufferers in the world, at around 110 million and 69 million respectively. Globally, the number is expected to rise from the current 415 million to 642 million by 2040.
Over the past 40 years, the 5 year survival rates for patients diagnosed with varying types of cancers have improved drastically in most areas. However, lung cancer is an outlier, primarily due to the late stage of diagnosis for many patients. Some hope has appeared in the area in recent years as new innovations in I-O are expected to support survival rates.
Four major players in the pharmaceutical industry are currently battling to be the front runner in the field. These drugs are the latest innovation in cancer therapies and use the body’s own immune system to help fight cancer. The drug helps the body selectively kill cancer cells and has found success when used in the treatment of metastatic melanoma. I-O is set to continue to dominate 2017 news, with three of the four leading I-O players preparing trials that are expected to extend survival rates. AstraZeneca, Merck and Roche will have the most significant data from competing combinations for lung cancer. The focus is on AstraZeneca's Mystic trial of Imfinzi and tremelimumab in first-line lung cancer, due before the end of the year. Mystic impacts longer-term growth of cells. The belief is that this continued innovation should support the sector.
Part of the original rationale for opening our call on the sector was valuations, which still look attractive on a relative basis despite the rally year to date. The sector had de-rated since 2015 on expectations that Hillary Clinton would be the next commander in chief of the United States and would put pressure on drug prices. However, with this possible barrier removed we have seen relative multiple expansion which we expect to continue given the numerous trends that bode well for the industry. The catalysts outlined above are expected to drive the sector in the coming years, and in a world where valuations are stretched it is the areas of the market that can deliver sustainable growth that offer the most attractive investment opportunities.