As shown in Exhibit 1 over the long term, despite periods of volatility, healthcare investors have enjoyed above-average total returns. While rhetoric ahead of the November 2020 US presidential election may cause some short-term pullbacks in the sector, industry fundamentals remain very favourable, which is supportive for the long-term performance of healthcare stocks. Secular demand remains robust, with a growing number of patients (helped by an ageing global population and rising incomes in developing countries); innovation in areas including gene therapy, immunotherapy and robotic surgery; a favourable regulatory environment (with a high number of drug approvals); and increased healthcare spending as a percentage of global GDP. Historically, mergers and acquisitions (M&A) have been an important driver of healthcare performance; it is encouraging to note the robust levels of deal activity last year, which could continue into 2020.
Exhibit 2 shows the valuation of global pharma stocks, which are by far the most dominant subsector of the healthcare industry. The Datastream World Pharma index is trading on a forward P/E multiple of 16.0x, which is broadly in line with its five-year average. Pharma stocks are trading in line with the world market, which compares with a 6.1% average premium over the last five years. Taken together, the backdrop of favourable industry fundamentals, robust levels of M&A and undemanding valuations suggest that investors with a longer-term view may benefit from exposure to the healthcare sector
As shown in Exhibit 1 over the long term, despite periods of volatility, healthcare investors have enjoyed above-average total returns. While rhetoric ahead of the November 2020 US presidential election may cause some short-term pullbacks in the sector, industry fundamentals remain very favourable, which is supportive for the long-term performance of healthcare stocks. Secular demand remains robust, with a growing number of patients (helped by an ageing global population and rising incomes in developing countries); innovation in areas including gene therapy, immunotherapy and robotic surgery; a favourable regulatory environment (with a high number of drug approvals); and increased healthcare spending as a percentage of global GDP. Historically, mergers and acquisitions (M&A) have been an important driver of healthcare performance; it is encouraging to note the robust levels of deal activity last year, which could continue into 2020.
Exhibit 2 shows the valuation of global pharma stocks, which are by far the most dominant subsector of the healthcare industry. The Datastream World Pharma index is trading on a forward P/E multiple of 16.0x, which is broadly in line with its five-year average. Pharma stocks are trading in line with the world market, which compares with a 6.1% average premium over the last five years. Taken together, the backdrop of favourable industry fundamentals, robust levels of M&A and undemanding valuations suggest that investors with a longer-term view may benefit from exposure to the healthcare sector.
