Breakthrough Alzheimer’s drug marks new era in healthcare innovation

Last week, the FDA approved Eli Lilly’s Alzheimer’s drug Kisunla. This is the second treatment available in the US, both drugs target plaques in the brain called amyloids to slow the progression of the disease, representing a breakthrough after decades of failures to find new treatments. It comes at an exciting time for the health sector generally: shifting demographics are creating more demand for healthcare, and there is also significant innovation happening across the sector, notably in areas such as oncology, vaccines and obesity.

One of the primary drivers of increased healthcare demand is the changing demographics worldwide. Populations are aging, especially in high-income countries, leading to a greater need for medical care. The World Health Organization estimates that an additional $200-328 billion annually* is required to scale up primary healthcare in low- and middle-income countries. In higher-income nations, rising healthcare costs are essential to meet the growing health needs of older populations.

Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.

The golden age of innovation

The healthcare sector is currently experiencing a 'golden age' of innovation, particularly in areas like genomic sequencing, oncology, vaccines, and obesity treatment. According to Andy Budden, investment director at Capital Group, the sector is now in its third wave of innovation—the genetic era**. This phase follows earlier waves focused on simple chemical compounds and protein-based therapies. The genetic era holds promise for transformative solutions, such as mRNA technology, which has applications ranging from cancer treatment to combating major viruses like Covid.

Innovative companies are at the forefront of addressing significant health challenges, creating substantial investment opportunities. For example, the development of GLP-1 drugs for obesity and diabetes by companies like Novo Nordisk and Eli Lilly has led to remarkable share price increases. These drugs, such as Ozempic and Wegovy, have driven demand due to their effectiveness in weight loss and managing related health conditions like diabetes and cardiovascular diseases.

However, investment opportunities in healthcare extend beyond simply pharmaceuticals. The field of medical devices and robotics is also seeing rapid growth. Robots used in surgeries can improve outcomes and precision, yet their adoption is still limited, indicating a long runway for growth. There are also companies that contribute to human health is other ways. The Liontrust Sustainable Future Monthly Income Bond, for example, invests in Veralto, a spin-out company from Danaher, which specialises in providing technology for water testing and treatment***.

Is healthcare attractive today?

The healthcare sector faced challenges in 2023, underperforming the broader global equity market. However, this underperformance presents an opportunity to invest at lower valuations. Additionally, political factors, such as healthcare policies in the US election, may influence market sentiment and create further investment opportunities.

The demand for GLP-1 drugs is sending a shock wave through health industries and has led to significant M&A during the first half of 2024, according to a report from PwC****. Novo Nordisk's success with GLP-1 drugs like Ozempic and Wegovy exemplifies the potential in the healthcare sector. These drugs have seen prescription volumes in the US increase by 300% between Q1 2020 and Q4 2022^. This surge in demand has driven Novo Nordisk's share price from around $23 five years ago to $103 by the end of 2023^^. The company's ability to supply these drugs is still catching up with demand, highlighting the growth potential for investors.

Additionally, advancements in related areas, such as more complex peptides and chemical synthesis, are opening new avenues for investment. Companies like Eli Lilly are developing newer drugs with improved manufacturing techniques, promising faster production at scale.

Investing in the healthcare sector

In general, picking individual healthcare stocks is fraught with problems. To paraphrase Indie band The Verve, the drugs don’t always work, and failures are expensive and time-consuming. This is particularly true at the higher risk end of the market, which may be exposed to a single treatment.

Investors can gain exposure to healthcare through specialist funds such as Polar Capital Healthcare Opportunities or the Polar Capital Biotechnology fund, but generally, investors will be better served by looking for a collective fund with a decent chunk of exposure to healthcare.

Healthcare is major area of focus for the CCLA Better World Global Equity fund. Charlotte Ryland, head of investments at the group, says: “There is an ageing population not just in the West, but in China as well. An ageing population means greater demand for healthcare. However, the innovation we’re seeing within healthcare is also important – whether it’s genetics, or areas such as immunoncology. It’s not just interesting products, but also the whole supply chain.”. With 20% allocated to healthcare, they hold medical supply company Thermo Fisher Scientific and clinical research company ICON in their portfolio^^^.

Healthcare is the second largest position (22.8%) in the BlackRock Global Unconstrained Equity fund after informational technology^^^. In addition, both the IFSL Evenlode Global Income and WS Montanaro Better World fund have significant positions at 20% and 26% respectfully^^^.

It’s also 18.3% of the Fidelity European fund, holding Novo Nordisk and Roche (pharmaceuticals) among its top holdings^^^. The T. Rowe Price Global Focused Growth Equity fund also has a significant portion (15.4%) holding both Eli Lilly and Novo Nordisk in their portfolio^^^. The Stewart Investors Asia Pacific Leaders Sustainability fund also has a significant overweight to healthcare (20.5%) compared to the index (4.4%)^^^.

*Source: WHO, 21 September 2023
**Source: Capital Group, 29 February 2024
***Source: FE Analytics, full portfolio holdings, 31 May 2024
****Source: PwC, 25 June 2024
^Source: Trilliant Health, 2023 trends shaping the health economy report
^^Source: Google Finance, Novo Nordisk A/S share price
^^^Source: fund factsheet, 31 May 2024

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.