What does the US election mean for healthcare investors?
A Biden win could dent sentiment towards the big pharmaceutical companies but doesn’t alter the long-term opportunity in healthcare.
Voting has already begun in the US presidential election with many polls predicting a win for Democrat candidate Joe Biden. A Biden victory has been perceived in many quarters as likely to be negative for the healthcare sector.
However, as with everything to do with US healthcare, the reality is more complicated.
The main focus for the incoming president – whoever it is – will be a financial stimulus package to ease the economic pain caused by the Covid-19 pandemic. Healthcare reform may well be a secondary consideration.
In addition, Biden potentially becoming president is only one part of the picture. Control of Congress is just as important. The Democrats will be much better able to achieve their policy aims if they achieve a “clean sweep”, taking control of not just the presidency but also the Senate and retaining their majority in the House of Representatives.
This may well happen. If it does, what would be the implications?
Healthcare investing isn’t just about big pharma
The Democrats’ key aim is to expand access to health insurance. In order to do this, they need to make it more affordable. Reducing drug prices is one potential way, which is why a Democrat victory has been seen as possibly detrimental to the healthcare sector.
There are two points to make about this. First of all, this potential pressure on drug pricing is likely to have the greatest impact on the big pharmaceutical companies who have established, well-known drugs. But while market sentiment towards big pharma may well dip, the broader sector may be less affected.
The US has a thriving biotech sector that is developing new drugs and treatments. No-one wants to cut this off and so we think pricing will remain resilient which it comes to new and innovative drugs.
Secondly, the complexity of the US healthcare sector makes it very difficult to achieve real change. The system is a web of interconnected rebates and subsidies. Cutting costs in one area can result in an unintended jump in costs elsewhere, leaving the overall picture unchanged.
Indeed, this year President Trump himself issued several executive orders intended to reduce patient out-of-pocket drug costs. One of these included a ban on rebates paid to health plan sponsors and pharmacy benefit managers (PBM) to pay for patient out-of-pocket costs.
The PBMs negotiate discounts off the list price of drugs and pass this on to their customers, whereas patients on Medicare pay 20% of drug costs based on list price and not the lower negotiated price. However, the rebates are normally used to lower the insurance premiums paid by senior citizens and the government, so banning them would likely cause healthcare access to become more expensive for many of those who need it most.
This example illustrates how complex the whole system is and how apparently simple solutions are in fact not at all easy to implement.
Long-term investment opportunity in healthcare
When investing in the healthcare sector, as with all equity investing, it’s important to take a long-term view. One-off events such as elections can cause near-term sentiment swings but we think the opportunity in healthcare is underpinned by three structural factors which are not going to change any time soon. These factors are ageing, cost, and innovation.
Demographic change is obviously something that happens slowly and the developed world has known for a long time that its population is ageing.
The oldest cohort of the baby-boom generation (usually defined as being born between 1945 and 1960) are reaching their 75th birthdays. This is typically the age at which complex operations like knee and hip replacements are required, as well as heart procedures.
Chronic conditions such as diabetes or arthritis also become more prevalent with age. Growing demand for operations and treatments should translate into stronger growth for the companies that provide these.
Of course, an ageing population that requires more healthcare treatment will put pressure on already-stretched budgets. This is truer now than ever with government finances squeezed by the Covid-19 crisis. Healthcare products and services that can make healthcare spending more efficient will be in high demand.
In the US, between 30% and 40% of healthcare spending is regarded as wasted, which creates a tremendous opportunity to drive efficiency.
Finally, innovation ties both of the above factors together in that new technology can drive better health outcomes and create savings.
Take diabetes, a chronic condition that (in its type 2 form) is on the rise across many countries. Standard treatment involved the patient testing their glucose levels several times daily via inconvenient – and painful – finger-prick tests. Inconvenience leads to reduced usage which leads to poorer health which leads to additional treatment being required at extra cost.
A more efficient method is to use a continuous glucose monitor (CGM) which involves a sensor under the skin that wirelessly sends information on glucose levels to a monitor, perhaps directly to a smartphone. CGMs are, as the name suggests, continuous so any change in glucose levels can be picked up and acted upon immediately, leading to better health outcomes.
That’s just one example of how technology and innovation in the sector can achieve better outcomes for patients and prove more efficient in the long run. There are many more.
The US election may well cause some short-term noise in the healthcare sector but as investors it’s important to keep our focus on the sector’s long-term growth potential. We see exciting investment opportunities across a range of healthcare niches, from gene therapy to robotics and from telehealth to biosensors and trackers. We therefore expect healthcare innovation to be a powerful investment theme for many years to come.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.