Healthcare industry market predictions for 2020 and beyond
Despite the US election causing uncertainty, analysts believe the healthcare industry is showing promising vital signs in 2020
It’s election year in the US, and inevitably stocks in the healthcare industry are under strain. There is uncertainty about who will be the Democratic nominee – and concern about the impact they could have on the bottom lines of some of the world’s biggest companies.
Yet, political strife notwithstanding, healthcare industry analysis shows reasons to be upbeat. The world’s population is ageing – and according to the UN, the number of people aged 60 or over has more than doubled to 962 million in the past 40 years. By 2050, this will double again to 2.1 billion.
Of course, a rapidly changing demographic means that healthcare businesses must urgently transform and grow to ensure they can cope with the strain that more chronic illnesses will place on the system. The swelling ranks of the middle class, coupled with breakneck economic growth in developing countries, is also contributing to demand.
The main challenges ahead include establishing the role of technology in future treatments and addressing drug pricing, which continues to attract controversy as public awareness increases. Here, we look at key healthcare industry trends – and get an idea of how economic analysts think this sector of the stock market will perform in the coming year.
Healthcare industry overview
Healthcare is a sprawling, diverse stock market sector – with estimates from November 2018 suggesting it is now worth at least $10trn (£7.7trn, €9trn) – so let’s remind ourselves of its main sub-categories.
First are pharmaceutical companies, which are primarily responsible for developing medicines sold in chemists and prescribed by doctors. Next, there is biotechnology – companies heavily involved in creating treatments and technology using living organisms. Some stocks focus on medical devices (everything from pacemakers and hip implants to blood pressure monitors and pregnancy kits). Lastly, there are companies that provide medical care – private clinics and hospitals that may run alongside nationalised healthcare services – and insurers.
The healthcare market outlook is almost always uncertain during US presidential election years. In the 2020 race, companies in this sector fear that a progressive candidate such as Elizabeth Warren or Bernie Sanders will win the Democratic nomination.
Both have proposed radical reform for the healthcare industry, driven by deep-rooted opposition to privatised treatments and profiteering. While Sanders wants Americans to receive government-backed coverage through tax deductions, Warren wants to shift the onus to employers – making them pay a fee to the government for every worker on their payroll.
According to figures from Fidelity, the share prices of healthcare providers in the US has grown by 15.6 per cent over the past 12 months – lagging considerably behind the broader S&P 500 figure of 23 per cent. Yet over the past three years, healthcare industry has outpaced the 44.2 per cent growth reported by the whole index.
Healthcare industry analysis shows that these stocks are regarded as defensive, mainly favoured in times of economic contraction and recession. This is when the sector tends to consistently overperform. When markets begin pick up, returns are often dwarfed by other industries.
Of course, other market forces are at play. Up-to-date demographic figures can have a positive effect on share prices because they are regarded as a signal that demand for healthcare products will increase. Fiscal policy and regulation can put these stocks under pressure, especially if taxes rise or governments place controls on drugs pricing. Investors also pay close attention to how research and development progresses – share prices often spike when clinical trials are successful and new products hit the market.
Trends in healthcare 2020
Analysts are beginning to get an idea of key themes for the healthcare industry in the 2020s. JPMorgan says drug costs are likely to be a hot topic for healthcare brands this year – in the US, Democrat and Republican voters agree that current prices are unreasonably high. Although the company says “constructive dialogue” has begun on how to make medicine more affordable and accessible, there is probably a long way to go before things change.
JPMorgan specialist Lisa Gill also sees exciting opportunities for consumer-facing healthcare brands, such as pharmacies, to embrace technology. She argues that many consumers shop for medicines and treatments in a similar way as other retail purchases – weighing up cost, location and service. She believes virtual and online-focused approaches to healthcare will blossom, adding: “Millennials are used to having everything delivered to them. I think in the future we'll see pharmaceuticals delivered by drones. We'll see more home delivery than we've ever seen before.”
Another interesting factor, especially with larger companies such as Pfizer, is the impact that expiring patents can have on their bottom line. This is when they lose exclusivity on drugs they have invented. A major wave is due to begin in 2025 and affected companies will have to ensure new products are in the pipeline to compensate for the anticipated shortfall in profits.
Deloitte says that a digital transformation in healthcare is beginning. Artificial intelligence, blockchain and analytics are helping medical professionals to focus on predictive and preventive care. IVirtual healthcare – AI-powered chatbots and video appointments – could be with us soon, with doctors accessing patients' health data through wearable devices.
Healthcare market outlook
So does the industry look healthy and investable in 2020? According to S&P Global, healthcare was the third-best performing sector in December 2019, delivering a total return of 3.6 per cent.
The Schwab Center for Financial Reform believes that, despite volatility caused by the 2020 election, the healthcare sector will outperform this year. Noting “solid fundamentals, strong momentum and attractive valuations”, it said: “Balance sheets in the healthcare sector remain flush with cash, increasing the possibility of higher dividend payments, share-enhancing stock buybacks, and mergers and acquisitions.”
Analysis from IHS Markit suggests that the healthcare sector of the S&P 500 is set to deliver the best dividend growth on a per-share basis in 2020 at a rate of about 10 per cent. Its forecast notes: “The amount of money spent on prescription drugs has nearly doubled over the past three decades as pharmaceuticals sales and profit margins have ballooned.”
Overall, experts emphasise that, whatever happens in November’s election, sweeping changes to the US healthcare system – or how drugs are priced – are unlikely this year. They also suggest that much of the uncertainty has already been priced into the healthcare industry, meaning investors could be spoilt for choice in pursuit of good-value stocks.
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