Add to that, longer and healthier lifespans mean many seniors have more time to work, save, and invest, enhancing their net wealth and spending capacity on healthcare.
Rising healthcare costs and Government challenges
Healthcare spending is becoming a significant component of national budgets worldwide. In New Zealand, for instance, total spending on healthcare accounts for 10% of gross domestic product (GDP), the Government covers about 80% of this cost, or 8% of GDP. This is a growing trend globally.
Governments are grappling with the costs, which are not solely attributable to demographic changes.
The average research and development (R&D) cost of bringing a new drug to market has soared to around US$2.3 billion ($3.68b) as of 2022. Contributors to this include the shift toward complex biologic (large molecule) drugs, development of treatments for rare diseases, and stringent regulatory requirements. Additionally, expenses related to medical devices and pharmaceutical manufacturing equipment have also risen.
These mounting costs compel Governments to make difficult decisions about the extent of services provided through public healthcare initiatives, which in turn is prompting individuals to seek private health and life insurance policies that offer a broader range of treatment options and benefits. Companies specialising in healthcare insurance and services are witnessing increased interest as a result.
Innovation amid complexity: Pharmaceutical research and production
While the number of drugs per billion has gone up and costs have increased, so has the sophistication and efficacy of pharmaceutical products. ‘Eroom’s Law’—the observation that drug discovery is becoming slower and more expensive over time — reflects the growing complexity of drug development.
Interestingly, the pharmaceutical industry’s operational model is evolving. Traditionally, large pharmaceutical companies managed the entire process — from discovery to marketing — in-house. Today, these functions are increasingly outsourced to specialised firms:
- Biotechnology Companies: small biotech firms are now the primary source of new drug discoveries, focusing on innovative therapies and niche areas.
- Contract Research Organisations (CROs): conduct much of the new drug discovery work and manage clinical trials, bringing expertise and efficiency to the process.
- Contract Development and Manufacturing Organisations (CDMOs): handle drug manufacturing and often collaborate with pharmaceutical giants through joint ventures.
This unbundling can lead to cost efficiencies and faster time-to-market for new drugs, potentially benefiting consumers and investors alike. This also creates significant opportunity for investment as the industry undergoes a significant structural shift.
Blockbuster drugs and market expansion
The global medicines market has expanded significantly, growing from about US$1 trillion in 2013 to US$1.5 trillion in 2022, according to Iqvia. Blockbuster drugs — those generating over US$1 billion in annual revenue — account for 30% to 40% of this market, despite representing a small fraction of approved medicines. Revenue from these drugs has grown at an annualised rate of about 10% since 2000.
A notable example is the advent of weight-loss and diabetes medications in the GLP-1 category. Companies such as Eli Lilly and Novo Nordisk have developed blockbuster drugs such as Ozempic, Wegovy, and Mounjaro. These medications not only address prevalent health issues but also signify the potential for single therapies to tackle multiple conditions, highlighting a promising pipeline for future treatments.
Emerging investment opportunities beyond pharmaceuticals
While pharmaceuticals often capture the spotlight, other sectors within healthcare offer compelling investment prospects:
- Life Sciences and Biotechnology: at the forefront of medical innovation, companies in this sector specialise in gene editing and personalised medicine. They provide essential equipment and services to pharmaceutical firms, fueling advancements in treatment options.
- Diagnostics: rapid advancements in molecular diagnostics and imaging technologies, bolstered by artificial intelligence, are enhancing the accuracy and speed of disease detection and diagnosis. This sector’s growth is pivotal for early intervention and improving patient outcomes.
- Medical Devices: the development of minimally invasive surgical tools and continuous monitoring devices, such as blood glucose monitors, is experiencing robust growth. These devices are becoming increasingly sophisticated, compact, and user-friendly, contributing to preventive care and alleviating pressure on healthcare systems.
- Personalised Care: a transformative approach in healthcare, personalised care involves tailoring treatments and preventive measures to individual patient characteristics. By leveraging vast amounts of data — including genetic information and lifestyle factors — this sector holds significant promise for improving treatment efficacy and patient satisfaction.
Why this matters for investors
The healthcare industry’s evolution is creating a landscape ripe with investment opportunities. Demographic shifts, technological advancements, and innovative treatments are driving sustainable growth across multiple sectors. For investors, understanding these dynamics is crucial to making informed decisions that align with long-term financial goals.
Jarden Wealth Limited is an NZX advisory firm. A financial advice disclosure statement is available free of charge at jarden.co.nz/our-services/wealth-management/financial-advice-provider-disclosure-statement/.
Full disclaimer available at: jarden.co.nz/wealth-sales-and-research-disclaimer.
