Healthcare Stocks Invest in Business, not Science

Even the best scientists in the world cannot reliably forecast drug-test results, so why should investors gamble? Quality businesses are key for healthcare stocks.

Healthcare stocks often serve as powerful painkillers during market declines. Yet the sector offers much more than just downside mitigation for investors who focus on business potential and resist the urge to predict scientific breakthroughs.

While the MSCI World Index fell by 18.1% in 2022, healthcare stocks fell by only 5.4%. 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 help fuel long-term 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 the common fallacy that drug trials can be predicted. During the pandemic, many companies tried to develop COVID-19 vaccines, but only a few succeeded. 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.