Investment Strategy

Healthcare innovation: It’s a new universe of potentially attractive investments

See what’s driving today’s key trends and how to identify opportunities while navigating the risks.

Innovation in healthcare has been rapid—and is set to accelerate dramatically in the coming years.

As the industry moves from analog to digital, “big data” in healthcare is set to explode. Advanced diagnostics will power the shift from treatment to prevention. Personalized medicine will lead to targeted therapies that are right for the individual. Meanwhile, a focus on enhanced aging is expected to increase longevity.

From a societal perspective, the implications of these trends are exhilarating. It seems the door is opening to new ways to treat, cure or prevent devastating diseases such as influenza and cancer that cause hundreds of thousands,1 even millions, of deaths2 every year.

Implications for portfolios are also profound. All of these trends are investible on their own, and together they form a compelling universe of choices for investors.

We are here to help you navigate these new, and rapidly changing, investment opportunities.

Driving healthcare innovation

The key drivers of today’s healthcare innovation are technology, public funding and demographic pressure:

  • Technology—Cheaper processing power, cloud computing and the growing sophistication of artificial intelligence (AI) are all helping accelerate innovation.
  • Public funding—Healthcare also benefits from significant government research efforts, which often generate entirely new lines of medical advancement.3
  • Demographic pressure—As the number of people over the age of 60 in the advanced world rises from 326 million today to an expected 405 million in 2040,4 the market for longevity and wellness innovation of all sorts is sure to grow, luring more capital into the industry and speeding innovations. Meanwhile, the market for more efficient treatments is likely to balloon, due to pressure on government budgets.5 Also reshaping the market are patients’ increasing expectations of customization and at-home delivery of services.

Key trends in healthcare now

Already we are seeing great responses to these drivers, and the coming years could bring new treatments and diagnostics that may change not only how we defeat various diseases, but also our perceptions of some medical prognoses.

Particularly exciting are such recent advancements as:

  • Messenger RNA (mRNA) technology—The world quickly became familiar with mRNA vaccines as companies such as Moderna, BioNTech and Pfizer used this technology to create lifesaving COVID-19 vaccines.

    It’s expected that mRNA vaccines will be used to fight many other diseases as well.

    Researchers at Memorial Sloan Kettering (MSK) are working on an mRNA vaccine to treat cancer.6 Companies such as Sanofi, GlaxoSmithKline and Pfizer are researching using mRNA vaccines to combat the seasonal flu more quickly and efficiently than traditional vaccines.7 Other companies, GreenLight Biosciences among them, are using mRNA technology to both create disease fighters and sustainable alternatives to common pesticides and herbicides.8
  • Advanced diagnostics and analytics—Recent developments in medical diagnostics have shown the promise of changing how diseases are detected, allowing them to be identified in early stages before developing into serious health threats.

    New testing and diagnostic methods, such as liquid biopsies, show particular potential to improve cancer detection. Current methods include expensive and time-consuming tests such as computerized tomography (CT) scans and magnetic resonance imaging (MRIs). Liquid biopsies may be an alternative that is non-invasive, quick, precise and relatively inexpensive.9

    A liquid biopsy takes a blood sample from the patient and searches for cancer cells or pieces of DNA from tumor cells in the blood—potentially before tumors are seen on CT scans or MRIs. Multiple blood samples over time may help identify changes in a tumor during treatment. Perhaps the biggest benefit: Such tests are expected to be conducted at home by a home-care nurse, and could soon be at an accessible price point for mass adoption.10

    In addition, there are promising advances in the analysis of clinical trial data. Companies, such as IQVIA, use software to integrate data and technology around clinical trials to expedite the development process for pharmaceutical researchers. The future of healthcare innovation is likely to rely on a surge of new data from clinical trials and testing,11 so platforms that allow researchers to analyze the data more efficiently will be crucial to the discovery of new drugs.

    The ability to analyze vast datasets will become paramount to discovering treatments designed specifically for individual patients based on their medical histories.
  • Medical devices—Health monitoring is being reshaped. Fitness trackers have already brought low-cost general health recording to the masses.12 Now, devices focused on specific health concerns (such as glucose monitoring) are becoming more available. We expect to see the trend of wearable medical devices to increase and help build the global health data sphere available to researchers, further accelerating innovation and discovery of new treatments.

The healthcare data stream is growing

Source: International Data Corporation. December 2020
This chart shows the number of shipments of smart wearable devices in millions of units shipped. The data is broken down into smartwatches and fitness trackers. The annual data encompasses historical data for 2016 through 2020, and forecasts for 2021 through 2030. Total wearables shipments in 2016 reached just below 100 million. Shipments gradually rise consistently through 2030 to reach about 600 million shipments. The breakdown of smartwatches and fitness trackers in 2016 is roughly evenly split. But smartwatch shipments grow at a consistently faster rate that fitness trackers during the years shown. By 2022, smartwatches account for about 2/3 of all wearables shipped. By 2030, of the total 600 million wearables shipped, smartwatches account for roughly 425 million compared to the 175 million fitness trackers.
  • Precision medicine—Precision medicine is revolutionizing the treatment and potential curing of diseases. It uses a patient’s full medical profile (from genetic data, medical history, environmental factors and even lifestyle) to create a customized, unique treatment and prevention protocol for that individual. As the cost of mapping the genome plummets, a detailed understanding of each person can move to the center of healthcare.

    Click here to learn more about precision medicine and our thoughts on investing in the space.

The cost of profiling your DNA is dropping dramatically

Source: Lazard, LAM Research, Illumina. As of July 2021.
This chart shows the cost of sequencing a genome in U.S. dollars from 2001 through 2019, with a forecast used for 2020 through 2030. The price of sequencing the genome stood at approximately $100 million in 2001. The cost steadily declined through the time series. By 2007, the cost had fallen to close to $10 million. In 2013, the cost fell to around $10,000. The most recent data as of 2019 shows that the costs is currently around $1,000. Illumina, a gene sequencing company, hopes to further lower the cost of sequencing the human genome in the coming years and hopes to achieve a cost as low as $100.

Whenever there are high expectations of a powerful and investable trend, there are always risks to be considered.

As powerful as a trend might be, if a starting valuation is incredibly high, the company’s future earnings growth may not be strong enough to deliver a positive return to investors. This tendency is magnified when businesses are generating losses at the time you are investing. And currently, many innovative healthcare companies are generating losses.

So as exciting as some of these early-stage innovators can be, they can reduce a portfolio’s risk and volatility to balance exposure to those front-line firms with others that are larger, more stable and established, but which are still involved in these innovative trends.

Also note that there is significant clinical trial risk in parts of healthcare, such as therapeutic innovation (and to a lesser extent medical devices). To reduce risk in this area, it may be advisable to invest in companies that have strategic partnerships with large, established firms.

Indeed, “platform” companies that help manufacture (rather than create) new drugs may provide a more predictable set of cash flows for investors, while still delivering exposure to the innovative drug market.

In addition, and speaking more broadly, worth noting are two persistent, potential risks in healthcare investments:

  • Increased regulation, which may slow drug and device development, or reduce the profitability of existing patents—However, the industry has escaped significant regulatory impact in recent quarters, even when risks appeared to be manifesting. For example, although the Biden administration proposed a COVID-19 vaccine patent waiver, there has not been much action or significant progress toward actually enacting a vaccine waiver.
  • Price controls of new drugs in the United States that are often well above the level charged in other countries—This concern came to the forefront earlier this year when some lawmakers pointed at the $56,000 price tag for the newly approved Alzheimer’s treatment Aduhelm. Still, even that criticism has not been as sharp as many expected. Getting wide support for new drug pricing regulation may be more difficult than many may have anticipated.

Are you interested in helping to create this future? Your J.P. Morgan team is available to help you explore this exciting new world of healthcare investments so that you can identify which opportunities suit your long-term financial goals.

 

 

1 Up to 650,000 people die of respiratory diseases linked to seasonal flu each year, according to the World Health Organization’s December 2017 reports.

2 Understanding Cancer, National Cancer Institute, 2019. In the United States alone, 41% of men and 39% of women will develop cancer at some point in their lives, according to Cancer Facts & Figures 2021, American Cancer Society, January 2021.

3 For example, in the United States, the National Institutes of Health (NIH), which has been the source of many medical breakthroughs, received almost $42 billion in the 2020 budget. Also, the Defense Advanced Research Projects Agency (DARPA) was instrumental in developing mRNA vaccines. In October 2013, DARPA awarded Moderna up to approximately $25 million to research and develop potential mRNA medicines as a part of DARPA’s Autonomous Diagnostics to Enable Prevention and Therapeutics (ADEPT) program, which assists in the development of technologies that rapidly identify and respond to threats posed by natural and engineered diseases and toxins. That $25 million award followed an initial award from DARPA given in March 2013. The DARPA awards have been deployed primarily in support of vaccine and antibody programs to protect against the mosquito-spread Chikungunya viral infection.

4 United Nations Population Division. Data as of 2021.

5 Most major economies face large fiscal deficits that will require significant budget consolidation in the future, according to the Organisation for Economic Co-operation and Development. In the United States, many of Congress’s ongoing budget discussions center on healthcare costs. See “Medicare Expansion Clashes With Health Care for the Poor as Budget Bill Shrinks,” The New York Times, September 20, 2021.

6 “Can mRNA Vaccines Fight Pancreatic Cancer? MSK Clinical Researchers Are Trying to Find Out,” Memorial Sloan Kettering Cancer Center, July 6, 2021.

7 “The Next Target for mRNA Vaccines after Covid-19: The Flu,” The Wall Street Journal, July 23, 2021.

8 “RNA Tech Firm Green Light Biosciences to Go Public in $1.5 Billion SPAC Deal,” The Wall Street Journal, August 10, 2021.

9 “Liquid biopsy in tumors: opportunities and challenges,” National Center for Biotechnology Information, National Institutes of Health (NIH), October 2018.

10 Some companies, such as NeoGenomics, offer mobile or in-home blood draw services for no added patient costs to the liquid biopsy. See https://neogenomics.com/diagnostic-services/specialty-testing/liquid-biopsy.

11 “Global strategy on digital health 2020–2025,” World Health Organization, January 2021.

12 S&P Global Market Intelligence, August 2020.

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