Health care innovation yields new opportunities for investors
Morgan Stanley Wealth Management03/24/23
Summary: Advances in technology and innovation have led to new breakthroughs in health care. Here’s a look at three areas of opportunity for long-term investors.
The past few years have seen the health care industry roll out vaccines, therapeutics, diagnostics, and patient care at breakneck speed, setting the stage for an acceleration in investment and innovation in the years ahead.
Morgan Stanley investment strategists believe these game-changing developments may present opportunity for long-term investors. Here’s a look at three areas they find compelling.
Advances in computing power and machine learning have contributed to gains in genomics—the study of all genes that can be found in an organism—over the past two decades, giving scientists detailed information about the nature of human genes and how human bodies are built. Look no further than the rapid development of messenger RNA (mRNA) COVID-19 vaccines to get a sense of the impact. Increased attention on genomics may be a positive driver for the industry, potentially drawing more aggressive funding from governments and private investors.
Morgan Stanley strategists expect to see more focus on additional mRNA applications, the technology that has driven COVID-19 inoculation in much of the world. One exciting area is hard-to-treat and rare “orphan" diseases, of which there are thousands but comparably few treatments. Another is cancer. And yet another: vaccine-elusive viruses like HIV and Zika, plus more common ones like the flu.
Beyond mRNA, better use of data and analytics has already greatly improved drug discovery. In coming years, new treatments in cancer, neurology, and gene-based therapies—areas of focus prior to the pandemic—may come to market.
Diagnostics and beyond
Innovation in areas such as diagnostics, detection, and patient care has also altered the industry. A growing number of companies are exploring tests that can detect various diseases in the early stages, including cancer, where a late-stage diagnosis is a leading cause of death. New blood tests that can detect early-stage cancer may lead to better patient outcomes, not to mention lower treatment costs.
Increasingly sophisticated and connected medical devices are driving improvements in convenience and care. For example, wire-free adhesive heart monitors can now capture cardiac data and transmit it to a patient's doctor, and pacemakers can relay data wirelessly to a patient's smartphone.
Of course, there are no guarantees when it comes to drug development and medical discoveries—behind every breakthrough is often a series of failures. Yet, innovation in the pipeline today is hard to ignore. For investors, a few considerations:
- The big picture: The macro environment may be favorable to the health care sector as overall technology costs continue to decline and we transition into a less interconnected world in which the US may need to shore up its own ability to provide access to supplies and treatments. What’s more, the health care sector has a lot of companies with strong balance sheets, high profitability, and dividend income.
- Value: The less-expensive areas of health care such as pharma, biotech, and services may present opportunity if innovation continues propelling growth for the sector. But it could vary from company to company based on industry trends, research and development, approvals, and other factors—as opposed to broad tailwinds.
- Growth: In search of potential bargains? Growth-style heath care stocks have been trading at a premium relative to other sectors in health care, but at a discount compared to other growth-oriented sectors of the broader market, such as pure tech, where stocks have continued to see rich valuations.
- Risk and reward: Rather than going all-in on value or growth strategies, diversify exposure for a balanced risk/reward profile.
Innovation and advancements in the health care sector are likely just beginning. As always, investors should be sure that any decisions reflect individual goals, timelines, and risk tolerance.