Research & Insights

Investing in health and pharmaceuticals

We take a closer look at the health and pharmaceutical industry, a sector you might like to consider for your investments. 

An industry in demand

Shares in companies that develop life-saving drugs, medical devices or biotechnology are classic defensive investments - these shares tend to hold their value, even when the economy slows. After all, demand for oncology drugs or insulin pumps doesn’t waver much, even in a recession.

While health and pharmaceutical companies tend to weather short-term economic changes well, there are some larger, long-term trends in the industry that are gaining more notice from analysts and investors. Many of these trends point towards overall growth for the sector.

Demographic changes

In developed countries around the world, populations are ageing. In Japan, a quarter of the population is currently 65 or older. By 2050, it’s predicted that a third of Spain, Italy and Germany’s populations will be over 65.

Since older people consume more drugs and medical services, many investors see this area as growth potential for the industry. This is compounded by the fact that many of today’s drugs are incredibly effective at managing chronic conditions. Patients with chronic disorders are living longer with their conditions than ever before and consuming more of these life-extending drugs, accordingly.

Emerging sales opportunities

Increasingly, companies in the health sector are targeting emerging economies. Younger populations, less developed health care systems and high drug costs mean that these markets are still minor for most drug companies. But rapid development is putting once unaffordable or impractical treatments within reach. This potential for growth is leading many investors to be bullish on the industry in general.

In addition to the potential to sell existing drugs in new markets, technological innovations offer an additional source of potential growth. Pharmaceutical and health companies invest heavily in research, and there are a number of potential game-changers currently in the early stages of development:

  • expanding the role of genetic testing in customising disease treatments
  • sophisticated medical devices that offer more targeted drug delivery
  • using stem cells to grow replacement tissues or even organs

Potential pitfalls

While there are many positive signs in the pharmaceutical and health industry in general, individual companies often face volatility in their share prices.

Pharmaceutical companies invest enormous sums into research, but the vast majority of potential drugs never prove safe or effective enough to bring to market. Most of these candidate drugs are eliminated from the pipeline early and chalked up to the normal cost of doing business. But each high profile failure of a potential blockbuster brings an inevitable fall in share prices.

Many companies also face an additional problem in so-called ‘patent cliffs.’ When a drug’s patent expires, competitors are able to make generic versions of the compound that sell for a fraction of the price. If a company loses too many patents at once without having any new blockbuster drugs to replace them, the result is decreased profits and lower share values.

Spreading the risk

For investors looking to gain exposure to the industry without the risk of holding individual stocks - which could be subject to drug failures or patent cliffs - an option could be to look at an industry-specific fund. As these funds can hold shares in a hundred or more companies, the risk of a single drug failure impacting the funds’ value is significantly reduced.

Legal & General offers an index fund with exposure to over 89 pharmaceutical and biotechnology companies and an additional 65 companies in the health care equipment and services sector. As it includes companies from all around the world, it offers geographic diversification as well as broad exposure to the industry.

Important information

The value of an investment and any income from it may fall as well as rise and is not guaranteed. You may get back less than you invest.