4 Min | Perspective

Markets

US election 2020 – the healthcare scare


George Ward

George Ward

Associate Portfolio Manager

Political uncertainty dominated headlines and markets alike during 2019. The healthcare sector would traditionally have been expected to perform well during such a period – offering a defensive safe haven in investors’ portfolios.

These companies typically pay attractive dividends and are less dependent upon the economic cycle as a driver of sales. In a period of slowing economic growth and anxiety over global trade, their shares could be expected to perform well.

But a quick glance at sector performance in 2019 reveals healthcare lagging towards the bottom. Despite the delivery of above-average earnings growth and optimistic outlooks for 2020 and beyond, the sector’s shares have come under pressure.

Healthcare share valuations drift in the run-up to US elections 

Wider US market (S&P 500) compared to the healthcare sector

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Source: Factset, Goldman Sachs Global Investment Research

Spooked by the election

The US election threat appears to be the root cause of negative sentiment. Despite the significant healthcare reform that has taken place in the United States in the past decade – in the form of the Patient Protection and the Affordable Care Act (“Obamacare”) – the industry is high in the sights of both the Republicans and the Democrats.

The most radical reform pledges to have gained traction come from Elizabeth Warren, among the favourites to win the Democratic nomination in coming weeks. Her flagship policy of Medicare for All would create a nationwide healthcare network that would end US citizens’ need for private healthcare insurance. While debate rages about whether or not the American taxpayer would be able to afford such a scheme, the insurance providers, referred to as Managed Care Organisations (MCOs), have seen their share prices come under pressure since the policy was announced in May. If introduced, such a transformative measure would wipe out the vast majority of their revenue source.

Elsewhere pharmaceuticals have also been under scrutiny as President Trump has prioritised lowering drug prices. As with his scheme to erect a wall along the Mexican border, the drug price commitment is a 2016 campaign promise that has so far not materialised. The complexities of the US healthcare system add numerous roadblocks to any significant reform.

Assessing the likely impact

While pharmaceuticals and MCO share prices have drifted in recent months, in reality “Medicare for All” lacks a broad base of support across the political spectrum. Equally, it seems highly unlikely that there will be price caps on drugs for the most innovative companies that are investing heavily in life-saving treatments.

As a result this political noise can present an opportunity for long-term investors who are able to look beyond this year’s campaigning, and focus instead on the underlying trends in research and development and what these might promise for growth in the years ahead.

Technological shift

Patent expiries mean that pharmaceutical companies must constantly innovate in order to develop new drugs to ensure their survival. Although the process of disease research and drug discovery is often life-changing, it has traditionally been expensive and time-consuming. The cost of discovering, testing and commercialising a new drug has barely shifted in decades, taking an average of 14 years and costing $2.6 billion.

In order to deliver faster analysis and discovery of drugs in a more cost-efficient manner, healthcare companies are streamlining their research functions by applying new technologies.

Cloud computing and artificial intelligence (AI) are two of the developing technologies that lie at the heart of this.

AstraZeneca*

Cloud computing and artificial intelligence (AI) are two of the developing technologies that lie at the heart of this.

UK pharmaceutical giant AstraZeneca is investing heavily in order to embed these developing technologies into its research and development process. It is aiming to analyse around two million genomes by 2026, using Amazon Web Services’ cloud data storage to hold the resulting data. It can then harness artificial intelligence to discover connections and correlations in this data in a matter of seconds – something which prior to these AI solutions would have taken a team of human researchers several years to undertake.

The company’s use of AI is not limited to disease understanding. It is also used in developing models that can forecast the likelihood of side-effects by analysing enormous data-sets from previous safety testing.

This improves decision-making, helping ensure only drugs with acceptable side effects are progressed – and avoiding costs by avoiding likely test failures.

The potential of this technology is increasingly evident, with the gene-editing technology raising AstraZeneca’s success rates in the early stages of drug discovery. Furthermore, the company’s drug-development rate has been maintained despite 50% fewer candidate drugs in development – as AI helps filter out likely failures earlier on.

Novartis*

Swiss pharmaceutical Novartis is also investing in streamlining its research and development function, and in October 2019 announced a five-year partnership with Microsoft with a focus on AI. Announcing the partnership Vas Narasimhan, Novartis chief executive, said: “We believe that by applying AI methods to our large clinical and pre-clinical data sets, we should be able to identify the patient populations that uniquely respond to different medicines.”

Combining AI with cloud data sources, new small-molecular clinical treatments are being identified within months. Previously this process took longer than five years. Novartis expects AI to be a fundamental part of the company’s future, emphasised by the CEO’s stated aim of transforming the company into a leading medicines company powered by advanced therapy platforms and data science.

As the pharmacetical industry combines deeper scientific understanding with greater technological power, it is transitioning from an era of random, high-volume discoveries to a more precise understanding of disease biology and a rational drug-design approach. After a season of patent expiries and fewer new drugs gaining approval, we are beginning to see the structural shift in healthcare R&D feeding through to a higher rate of medicines reaching patients. This is reflected by the improving numbers of drugs and biologics (such as vaccines) that are gaining approval from the US Food and Drug Administration.

Gaining pace: treatment applications are on the rise

New drug appliations (NDAs) and biologics licence applications (BLAs) by year

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Source: US Food & Drug Administration

Data is key

The scale of data storage supported by cloud computing is enabling companies to organise and analyse enormous volumes of information collected at both a patient and biological level. Data scientists are able to interpret this with the support of AI in order to generate further knowledge of diseases and to identify new drug targets. This should drive a new cycle of revenue and earnings growth for the most successful drug developers. There is much cause for optimism in the healthcare industry.

*These are not investment recommendations

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