This Healthcare Stock Forecast article was written by Meiru Zhong – Financial Analyst at I Know First.

Highlights

• US healthcare spending is expected to reach $6.2 trillion, accounting for 20% of GDP by 2028.
• The most important trends and themes include the transition to value-based care, digital healthcare, pattern cycle dilemma, and focus on companies with pricing power.
• Investment in subsectors, like managed care, medical devices, life-sciences tools, pharma, and biotech, should be prioritized in portfolios.
• Investors should pick out companies that have sustainable innovation and pricing power.

US Healthcare Industry Size

Healthcare is one of the most important and fast-growing industries. Its sustainable growth is driven by the aging population, rising prosperity, and increased need for new therapies.

The global healthcare market will reach $665.37 billion by 2028, according to Verified Market Research. National Health Expenditure (NHE) grew 2.7% to $4.3 trillion in 2021, accounting for 18.3% of the Gross Domestic Product (GDP) in the U.S. This figure is expected to reach $6.2 trillion with a CAGR of 5.4% from 2019 to 2028 based on Centers for Medicare & Medicaid Services report. The health sector’s proportion of the economy is anticipated to increase to 20% in 2028 as NHE is anticipated to grow 1.1% faster than GDP annually on average between 2019 and 2028.

Emerging Themes to Watch

The healthcare sector, a defensive sector, has outperformed the broader U.S. market over the past year. So after the epidemic, in what direction will it develop? What challenges need to be addressed? What are the opportunities? According to Barron’s Weekly’s annual healthcare roundtable, there are several emerging themes to watch.

Transition to Value-based Care

The transition from volume-based to value-based healthcare is accelerating, indicating that delivering personalized and high-quality care will be a vital theme. People are increasingly dissatisfied with the existing model of care delivery since the fragility of the current system has become apparent during the pandemic that necessary services and products couldn’t be produced or delivered. Providers will have no choice but value-based care, which will focus on actual outcomes rather than the volume of services delivered.

Digital Healthcare

There is no doubt that the pandemic has boosted the adoption of digital health technologies and transformed the health space. Companies proactively equip their operations with digital tools and computing programs that transform the way customers access, pay, and experience. For example, patients can get digital prescriptions and home-delivered medications from their phones or computers. Internally, companies are also starting to use digital innovations to integrate health data and visualize data to get meaningful insights. Digital health is an unstoppable trend and one of the most important drivers of industry growth.

Patent Cliff

Another important theme is the possibility of continuous innovation by a pharmaceutical or biotech company. While Covid-19 has seen biopharmaceutical companies’ ability to design, manufacture and distribute drugs and vaccines, many of these companies face large patent cycles, meaning many patents are expected to expire and innovations will become available to the public. For these companies, patents are key to winning markets and earning hundreds of trillions of dollars, giving owners the right to exclude others from making, using, or selling the invented technology or product. If they haven’t innovated in other areas to address the patent cycle issue, it’s hard to say whether their current revenue growth would be sustained or not. Therefore, it is crucial for investors to pick companies with sustainable innovation engines.

Companies with Pricing Power

In a high-inflation environment, companies that can afford to raise prices to offset inflation are the most attractive. They can keep profits intact and grow despite the challenging environment. In general, these types of firms may offer unique and vital or limited-supply products or services, indicating low price elasticity and insensitivity to economic cycles. It’s clear that a company, that has been resilient through the downturn, has the ability to do it again.

Investible Subsectors in Healthcare Value Chain

In the healthcare value chain, there are a few segments that appear to be investable and promising.

Managed Care

Managed care companies (i.e., health insurance networks) have attractive growth opportunities due to an aging population and the shift from fee-for-service to value-based care. It can offset inflationary pressures with higher premiums in the short term, and it benefits greatly from a shift to value-based care in the long term. But now many public and large managed care companies not only provide insurance but also participate in more risk-based services. UnitedHealth Group (UNH) and Humana (HUM), two of the largest health insurers in the US, are both transitioning to value-based and risk-based providers, either by owning primary care clinics or moving to home-care services.

Medical Devices

Medical device companies develop medical devices used to diagnose, treat, or prevent various diseases. The business is starting to recover from the hit during Covid as global supply chains have resumed and supply costs have stabilized. Additionally, utilization rates are almost at pre-pandemic levels due to an increase in the number of procedures, which is positive for healthcare facilities and medical-device companies.

Life-Sciences Tools

The life science tools subsector has historically been favored. Companies in this space primarily provide specific tools or ingredients for manufacturing to biopharmaceutical companies, earning recurring revenue at high-profit margins. They have predictable business models and strong pricing power due to specialized products, remaining an attractive area for long-term investment. Illumina (ILMN) is a leading developer, manufacturer, and marketer of life science tools and integrated systems for large-scale analysis of genetic variation and function. It acquired Grail in 2021, giving it access to the blood-based early cancer detection market. Grail has developed a blood test designed to screen for multiple cancers, while many other companies are working on single-cancer blood tests.

Pharma

Big pharmaceutical companies like Pfizer (PFE) have shifted their focus to investing in their own pipelines by developing innovative drugs and vaccines. The demand for drugs is relatively inelastic because people can reduce other discretionary goods or services but not drugs. That means a recession won’t spell disaster for pharmaceutical companies, and companies like Pfizer and Merck can maintain healthy profit margins during the downturn.

Another alluring pharmaceutical company with a well-defined plan for successful expansion is Eli Lilly (LLY). The company is currently launching Mounjaro to treat diabetes. This transformative asset could be developed to treat obesity. According to Barron’s, by the end of the decade, its earnings per share might increase from $8 this year to around $30. The patent cycle is the mid-2030s and beyond, without a patent crisis in the short term.

Biotech

Recently, some biotechnology companies have made high-profile progress in clinical research on major diseases. Therapies from companies such as Verve Therapeutics (VERV) and Intellia Therapeutics (NTLA) are already in clinical trials and will soon be available to patients.

Strong performance and a promising environment have boosted acquisitions led by Big Pharma companies. According to Investor’s Business Daily, Bristol Myers Squibb (BMY) acquired Turning Point Therapeutics for $4.1 billion as a part of its cancer portfolio. Merck is reportedly interested in buying Seagen. The companies are already collaborating on cancer drugs. The deal, reportedly worth about $40 billion, would be Merck’s biggest transaction in a decade.

SPDR S&P Biotech (XBI) has outperformed the S&P 500 since 2008, although the gap narrowed in 2022. Many young biotech companies are going public in 2022, and the market is excited about innovation by giving high valuations. But higher interest rates and a challenging outlook have led to a revaluation of the companies, sending stock prices volatile. That said, there are still quite a few innovative companies trading at valuation levels not seen in a long time, and investors can re-engage and consider companies whose share prices have fallen more than 30% over the year.

Healthcare Stock Market Forecast: Investing in Healthcare Stocks with I Know First

I Know First provides predictions for the Healthcare industry based on the AI algorithm for six horizons: 3-day, 7-day, 14-day, 1-month, 3-months, and 1-year. I Know First has constructed four forecast packages that cover the industry: Healthcare Stocks, Medicine Stocks, Pharma Stocks, and Biotech Stocks. Below, we can observe the performance of the prediction of these packages which were sent to our clients (you can access our forecast packages here).

Package Name: Healthcare
Recommended Positions: Long
Forecast Length: 1 Year (1/26/22 – 1/26/23)
I Know First Average: 22.11%

Package Name: Medicine Stocks
Recommended Positions: Long
Forecast Length: 3 Months (10/26/22 – 1/26/23)
I Know First Average: 14.3%

Package Name: Pharma Stocks Forecast
Recommended Positions: Long
Forecast Length: 1 Month (12/30/22 – 1/31/23)
I Know First Average: 39.23%

Package Name: Biotech Stocks Forecast
Recommended Positions: Long
Forecast Length: 1 Month (12/30/22 – 1/31/23)
I Know First Average: 38.09%

Healthcare Stock Forecast: Conclusion

2023 will be a challenging year with recessionary and inflationary pressures, but I remain optimistic about medical developments. In the turbulent two years of the stock market, the healthcare industry has been performing better than the market, which not only reflects the irreplaceable competitiveness of its products and services but also conveys the high expectations of investors. When picking stocks, investors should give priority to companies with continued innovation and pricing power.

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Please note-for trading decisions use the most recent forecast.