by Edwin C. Ciskowski, MAcc, CPA, CTFA
Senior Portfolio Manager, Florida Trust Wealth Management
How important is healthcare to the economy, and to your portfolios? Medicare and Medicaid consumed $1.5 trillion of the $6.8 trillion US budget in 2024, an amount roughly equal to the outlay on Social Security. If one further includes the amount spent on private healthcare of approximately $2.5 trillion (hospital care, prescription drugs, dental, administrative, public health, incidental out-of-pocket, and military), the resulting $4 trillion total is an amount larger than the GDP of all countries other than the US, China, and Germany.
Curiously though, healthcare is but the 5th largest sector in the S&P 500. At 9.6% of the index, healthcare trails communication services, consumer discretionary, financial services and information technology in terms of index weight. Therefore from an equity market perspective, the industry seems underappreciated and possibly undervalued. It certainly has underperformed, over both the near-term and long-term, relative to these other sectors.
Concerns over patent cliffs, product pipelines, payment rates, and administration policy shifts may overlook the immense scale and scope of advancements in treatment we have witnessed and that should persist to both patients’ and shareholders’ benefit. For example, a cancer diagnosis has profoundly improved survival and quality of life trajectories than just a few years ago. Merck’s immunotherapy treatment KEYTRUDA, the world’s highest grossing pharma product, can innovatively target a range of cancers. Similarly, someone diagnosed with progressive heart failure may pursue a remarkable new treatment called TAVR (transcatheter aortic valve replacement). Advanced by the firms Medtronic, Abbott, and Edwards Lifesciences, it is a minimally invasive surgical technique, and one that is saving and extending many lives. For those suffering from obesity or its comorbidities such as diabetes, heart disease, sleep apnea, osteoarthritis and certain cancers, the discovery and success of GLP-1 receptor antagonists (sold by Eli Lilly and Novo Nordisk) are literally a godsend, and this market alone is expected to triple to $150 billion over the next 5 years.
Life extending and saving therapies do require extensive testing to prove concepts, and establish efficacy and safety, sometimes over many years. In 2024, approximately 12,000 Americans turned 65 every day. By 2030, one in five Americans will be 65 years or older, entering their peak years for healthcare spending. Given these acute and increasing demands on the space, it’s rather amazing and somewhat troubling to consider that 90% of drugs that enter clinical trials fail. Given the aging population, the increasing cost to deliver healthcare therapies, and the pressing budget issues at state or federal levels, as Chief Brody said in 1975’s Jaws, “You’re gonna need a bigger boat.”
Enter AI (artificial intelligence) and humanoid robotics. The potential for AI to speed discovery of pharmaceuticals and biologics, to more accurately and quickly diagnose medical conditions and images, and for humanoid robotics to enhance care and possibly reduce the cost to provide care holds great potential for closing the gap between challenged supply and surging demand within the sector.
This challenge isn’t lost on the broader market, and is being embraced by other sectors and players. In 2022, tech giant Oracle purchased the largest US healthcare IT company, Cerner Corp., and last year announced its intention to move its corporate headquarters to Nashville, an emerging hotbed for healthcare service startups and home to established names like HCA.
Necessity, and return-seeking, is truly the mother of invention, and healthcare is no different in this respect. At The Trust Company, we believe the sector needs to remain a core staple in portfolios. With many demographic and technological tailwinds, these stocks should be a source of durable returns, and dividends, for many years ahead.
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