Healthcare Stocks: Invest in Business, not Science

Healthcare stocks served as powerful painkillers during last year’s market declines. Yet the sector offers much more than just downside protection for investors who focus on business potential and resist the urge to predict scientific breakthroughs.

While the MSCI World Index fell by 8.7% last year, healthcare stocks advanced by 4.8%. But healthcare’s reputation as a defensive haven understates the sector’s attractions. Pharmaceutical groups, medical device manufacturers and healthcare providers are benefiting from big trends that can fuel returns for investors who are skilled at deciphering the complex forces shaping the sector.

Three Big Trends

Three forces are stimulating change in healthcare today: innovation, pricing structures and policy. However, these dynamics often clash and complicate the investment outlook for a product or company. Will people pay more for a revolutionary treatment if it isn’t covered by a healthcare system? Is a government likely to provide meaningful subsidies for a new diagnostic technology? Are current prices sustainable over the long term? Questions like these vary from country to country, based on government policies, national economics, and spending or cultural preferences.

Despite these challenges, we believe there are ways to make informed judgments across the industry that can lead investors to solid sources of profitability and investment returns. The first step is to avoid a common fallacy: don’t make predictions about drug trials. Even the best scientists in the world cannot reliably forecast drug-test results, so why should investors gamble? Instead, develop a clear picture of how innovation, pricing and policy dynamics could affect a company’s profitability and growth rate.

Medical Innovation

Scientific innovation has underpinned healthcare advances for decades. Yet in many ways, the technological revolution in healthcare is still in its infancy. Investors need to look beyond cutting-edge equipment or biotechnology research to understand how innovation will reshape the industry. For example, although the use of big data is still relatively limited in pharmaceutical development, over time, it will probably become an integral tool in improving the efficacy of drug trials.