Healthcare Industry Outlook 2020 Market Overview
The healthcare industry is one of the largest and fastest growing industries globally. By 2040, the World Economic Forum (WEF) predicts that USD 25 trillion will be spent on healthcare up from US$ 11.9 trillion in 2018. Market consensus is that the industry will grow at a CAGR of 5% from 2019 to 2023 up from 2.7% in 2014-18. In our view, fresh investor interest following Covid-19 and complete revitalisation of the industry will push this markets consensus CAGR up higher.
The industry is comprised of:
- Drugs/pharmaceuticals – Biotechnology firms (companies that, broadly, use live organisms – bacteria/enzymes – to manufacture drugs), big pharma (top 10 drug manufacturers by revenues), and generic drug manufactures.
- Medical equipment – Equipment ranges from PPE (personal protective equipment) for medical staff to hi-tech, e.g. MRIs and endoscopes.
- Managed healthcare – Medical insurance providers.
- Healthcare facilities – Hospitals, clinics, laboratories, psychiatric facilities, and nursing homes.
Global healthcare spending is expected to slow to 3.2% in 2019 from 5.2% in 2018. This is a result of currency volatility and decelerated economic growth due to US-China trade tensions and Brexit, but not Covid. As a share of GDP, market consensus is that global healthcare will reach 10.2% in 2023 up from 8.8% in 2018. We expect healthcare’s share of GDP to beat market consensus, driven by two factors, increased investment and willingness for private individuals, companies and governments to spend on and invest in healthcare during and post Covid, and additionally a contraction in global GDP where healthcare is not a budget item to be cut.
In 2018, the US had the highest percentage of GDP spent on healthcare at 16.9% followed by Switzerland (12.2%), France (11.2%), Belgium (10.4%), UK (9.8%), Greece (7.8%) and Turkey (4.2%). The US government spends so much more on healthcare because prices of medication, medical care and hospital administration costs are higher than other developed countries. One of the US government’s trade negotiations with the UK has been the abolition or exemption from the UK’s price monitoring and drug approval body, NICE.
The bottom line is that the US government does not support the healthcare industry by controlling prices. Rather it encourages insurance companies and healthcare providers to compete against each other. In other developed countries governments are able to negotiate the price of drugs, hospital care and medical equipment.
Covid-19 has overwhelmed the healthcare insurers and pushed the limits of government budgets. This could be the trigger that will force governments to force change to the healthcare industry’s business operations strategies, moving it away from large pharma monopolistic and oligopolistic behaviour, in hope of creating more room for small and mid-cap companies.
There are several trends affecting the growth of the healthcare industry.
- Aging population
- defined as aged 65 or over. According to the UN this demographic will account for 16% (one in six people) by 2050, up from 9% in 2019.
- Increased prevalence of chronic diseases (NCDs – non-communicable diseases that cannot be transferred from person to person)
- The WHO predicts that NCDs will increase by 57% in 2020, up from 46% in 2001; with emerging markets hit the hardest due to lack of appropriate infrastructure.
- Infrastructure investments
- Large global institutional investors interest will peak as physical assets (hospitals, medical centres, labs, etc.) become ‘safe harbour’ investments and protect investor interest.
- Technological advancements
- Transform unsustainable healthcare services via digitalisation so they become more sustainable through better monitoring systems and scanning equipment. e.g. electronic health records, telemedicine/telehealth, wearable technology sensors, and wireless communication.
- Evolving care models
- Care model innovations that can track behavioural microeconomic trends (microeconomics needs vast data pools for predictive models to be reliable or at least useful) in order to focus on preventative protocols as well as better identification of the right course of treatment.
- Higher labour costs
- Hiring in hospitals of skilled staff has increased since the Great Recession of 2008-10 in order to meet consumer demands, aging population demographics, and the use of advanced technology.
- Expansion of health care systems in developing markets
- Developing markets such as Indonesia, Thailand, the Philippines, and India are joining their developed economy cousins by providing universal healthcare to their citizens.
While there are many drivers for healthcare growth, like any industry it does not come without challenges.
- Maintaining financial stability
- Due to increased NCDs and higher costs of infrastructure, technology and labour; many national state funded healthcare systems are struggling to keep up (The European Union members). To offset this, governments are focused on preventative care and healthcare companies are implementing payment reform to provide affordable care.
- Lag in care model innovation
- Consumers want more transparency(quite rightly) and are more participatory and better informed about their care options, expecting personalised services. As a result, health systems have transitioned to increased outpatient procedures, in-home care and even virtual telehealth.
- Digital transformation lost opportunity
- Healthcare big data is on the rise. Big data is about collecting and analysing patient and clinical data that is too large or complex to be processed by traditional human systems. Digital transformation is the industry’s future and the foundation for advanced care delivery. It can also provide cheaper and less invasive treatment.
- Uncertainty in the labour force
- Employees in healthcare face uncertainty around their jobs, the hours, the salaries, contracts, the levels of employer commitment, and relationship pressure brought about by unpredictable and extended working hours, etc.. Therefore, organisations are moving towards alternative working conditions (i.e. working from home) or innovative technologies to decrease staff turnover rates.
These issues and the effects of Covid-19 have forced governments to amend policies in order to face market pressures. Countries such as China, Russia, India, and the UK have made significant efforts through fiscal stimuli and improving regulations and consumer purchasing power.
As a result of the continuing US-China trade war, in 2020 the Chinese government has focused its efforts on bringing down pharmaceutical prices and promoting competition in the healthcare sector. China is shifting towards centralised tenders vs. public tenders for off-patent medication in response to big pharma, biotech, and medical devices supplier demand.
The Russian government plans to become more self-sufficient by focusing on innovation in pharmaceuticals. The government has signalled that during 2020 it will work to improve the public healthcare system and Russia’s medical infrastructure, increase funding, and introducing transparency measures to fight corruption. Market consensus is that these as fine words that are unlikely to be backed up by solid action, in the case of healthcare we are not so sure the markets have this right. Putin and his close advisors understand what their people will forgo and what they will not.
India’s 2020-2021 budget plans to increase increased government spending in healthcare in order to supplement government insurance schemes and infrastructure. India is planning to protect its local homegrown healthcare industry via price controls in order to reduce competition from foreign companies and focus on improving India’s foreign investment environment.
The UK’s healthcare spending budget only increased by 2.4% in 2019-2020, however a more drastic increase is expected for 2020-2021. This is on the back of increased government spending for the National Health Service (NHS) and the uncertain, but likely, negative economic impacts from Brexit and Covid. Fiscal stimuli will need to increase in order to keep costs to the consumer low.
The futures of all national healthcare systems are reliant upon a collaborative effort of all stakeholders. At the forefront of everyone’s personal agenda should be affordable, reliable, personalised healthcare for the entire population.
At the forefront of investors’ agendas is the growth in an ageing population, the digitisation of services, the likelihood of an increase in the frequency or pandemics or epidemics, the progress in genomics and remote constant life-long medical monitoring.
Other areas of renewed interest, though more niche will be vaccines and, finally, we forecast, a return to the development of new antibiotics. It is a bright bright time for cutting edge areas of healthcare, possibly one of the few silver linings created by the Covid crisis.