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Healthy outlook for the healthcare sector

The global healthcare sector offers investors long term structural growth. This is driven by ageing populations, changing lifestyles, technological progress supporting medical innovation and a favourable regulatory environment. According to the United Nations, the proportion of people over 60 is set to treble to two billion by 2050 and rising obesity rates are leading to increased prevalence of diseases such as type 2 diabetes and high blood pressure. Many emerging countries are expanding their national healthcare systems and the growing middle classes are increasing their spending on private healthcare services.

Technological progress in research & development is allowing better understanding of biological processes and genomics, leading to a transformation in the way scientists research diseases. These developments are likely to improve how patients are diagnosed and treated in the future. Technological advances are also improving the economics of patient care, for example by offering online appointments with doctors or through wearable digital devices that increase patient adherence to medical treatment and advice. The regulatory environment has also improved with regulatory bodies increasing their cooperation with drug companies leading to speedier approval processes. In the US, the FDA (Food and Drug Administration) approved 46 new drugs in 2017 and an average of 36 drugs in the last five years compared to only 28 drugs in the prior five-year period.

The challenge for the sector is that this increased demand is putting a strain on government and payer budgets globally. This is important for the US which is the largest healthcare market in the world and makes up around half of global pharmaceutical sales. There has been a lot of political commentary on high drug prices in the US and looking ahead we are unlikely to see like-for-like price increases, but encouragingly there has not been a wholesale change towards a single payment system which might have put more meaningful pressure on drug pricing. We believe that genuinely new and differentiated medicines which target unmet medical needs and/or provide cost savings for example by eliminating the need for lengthy hospital stays will continue to achieve pricing which will encourage ongoing investment in research and development.

Currently, many of the major global pharmaceutical companies are trading towards the lower end of historical valuation ranges as investors have focused on the negative aspects of the drug pricing environment as well as the growing presence of generics. However, we prefer to focus on the long term structural growth drivers outlined above and seek to identify the companies best placed to benefit from these trends. These would include genuinely innovative companies operating in areas such as biotechnology, oncology and rare diseases.

Speirs & Jeffrey Research Department

1 August 2018