TL/DR –
From 2010 to 2015, the healthcare sector experienced a period of significant growth due to merger and acquisition activity and new product launches, with biotechnology particularly flourishing due to innovation. However, things changed around 2015, with a reduction in innovation and M&A activity, more patent drugs coming off patent, and a significant drop in M&A activity between 2022 and 2024, leading to underperformance in the sector. Despite this, the United States is still seen as subsidizing the rest of the world with its innovation in healthcare, although this has led to the country spending more on healthcare than other developed nations.
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Recent Debate Highlights Healthcare Spending and Sector Investment Trends
An episode of the VALUE: After Hours Podcast featured a discussion
between Taylor, Carlisle, and Andrew Summers on the topic of healthcare
spending in relation to GDP in the U.S and the rest of the world.
Healthcare Sector Performance and Investment Interest
According to Andrew Summers, the healthcare sector experienced robust
performance from 2010 to 2015, post the financial crisis, which stimulated
increased merger and acquisition activity and exciting product launches. This
proliferation of activity made the sector an attractive investment prospect. The
biotechnology sector, in particular, thrived during this period due to the
innovations emerging from that subsector.
However, circumstances changed around 2015, with the sector experiencing a decline,
mostly due to more patent drugs expiring and a slowdown in the pace of innovation.
A significant drop in M&A activity was also observed from 2022 to 2024, leading to
a period of underperformance for the sector. Despite this, the healthcare sector
still appears to be more attractive compared to the broader market.
Healthcare Spending as a Fraction of GDP
A graph shown in GMO’s piece revealed that healthcare spending as a
fraction of GDP in the U.S was at 18%, significantly higher than the 10% average
of other OECD nations. Andrew Summers commented on this, stating that although
the U.S does spend more on healthcare compared to other nations, it might be
attributed to the country’s contribution to innovative healthcare solutions. Consequently,
these innovations lead to higher prices for healthcare services within the country.
While countries outside the U.S, such as those in Western Europe, pay much less,
the argument is that they are being subsidized by the U.S’ innovation.
The Trump administration has addressed this issue, leading to unprecedented price
concessions from drug companies within the U.S. The Inflation Reduction Act has
pressurized the sector, especially affecting drugs, which further emphasizes the fact
that the U.S is spending a considerable amount more than other developed nations.
The Biotechnology Sector
Despite the perceived overspending, the U.S has a wider range of available
drugs compared to the rest of the world. This availability, however, is contingent
on local regulator approval. Hence, while other nations may want to pay lower prices,
their access to these drugs is ultimately determined by the drug companies.
Specifically, the biotechnology sector was also brought to the discussion. Andrew
Summers revealed that there had been a significant increase in fund allocation to
biotech/pharma, rising from 5% to 40% within a year. This increase is credited
to the sector’s undervaluation after several years of being out of favor. He further
explained that the biotech sector is primarily driven by cycles of innovation.
More details about this discussion can be found on the VALUE: After Hours Podcast.
The Podcast is also accessible on various platforms including: Apple Podcasts, Breaker, PodBean, Overcast, Youtube, Pocket Casts, RadioPublic, Anchor, Spotify, Stitcher, and Google Podcasts.
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