FCP OP MEDICAL BioHe@lth-Trends - medical.lu

Development of the Capital Markets in the Period under Review
Development of the capital markets in the period under review
Health growth market and general financial conditions
Health – that is to say a better quality of life and longer life
expectancy – is generally regarded as one of the highest priorities
in developed industrial nations. Accordingly, the risk of illness
within the population is covered through various types of insurance
in such countries. Generally speaking, the scope of services
provided by health insurance companies has expanded
continuously since the 1950s. This is reflected in the increase in
premium rates among the health insurance companies. In
Germany, these rates have increased among statutory health
insurance funds from 6% of the basis for assessment of income in
1950 to 14.2% in 2005 (source: Federal Ministry for Health and
Social Security, FAZ Sunday, 26 June, 2005).
In the USA the biggest and fastest-growing health market, the
healthcare sector, has expanded from a 5% share of gross national
product (GNP) in 1960 to 15% in 2004 (a volume of some
USD 1,700 billion). Growth in the health sector was therefore
constantly above that of GNP, and ultimately became the biggest
sector in the US economy. By the end of the decade, the health
sector could even rise to around 18% of GNP (source: Centers for
Medicare and Medicaid Services).
Fig.1: Growth of health expenditure in USD billions in the
USA, Source: CMS
In addition to the structure of the health insurance systems,
demographic change, medical progress and innovative
developments in diagnostics and therapies have been the major
driving forces behind the growth of health expenditure.
In the booming economy of the late 1990s, the increasing cost of
healthcare and drugs did not appear to be a problem. However, in
the current difficult economic climate, and against a background of
global competition, the continuing rise in health expenditure is
becoming an increasing burden.
The introduction of a host of cost-cutting measures is designed to
ease the burden on both companies and national budgets brought
about by the rise in health expenditure. At the same time, the
measures represent an attempt to promote cost-conscious
behaviour on the part of patients. With the largest demographic
group among the industrialised nations, the so-called ‘baby
boomers’, due to reach retirement age by the end of the decade, the
time for such measures has become pressing. The population is not
just becoming older, however – it is also becoming increasingly
overweight. The American Heart Association estimates that 135
million people, or 46% of the US population, are overweight or
2
Expenditure in USD billions
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
1960
1962
1964
1966
1968
1970
1972
1974
1976
Expenditure in USD billions in % BSP
in % BSP
20
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
18
16
14
12
10
8
6
4
2
0
obese. Being overweight increases the risk of chronic illnesses
such as heart disease, diabetes, high blood pressure, arthrosis and
strokes. At the same time, new molecular biology discoveries
coupled with an improved understanding of the nature of certain
illnesses and modern procedures in medical technology have
resulted in innovative therapeutic facilities. This combination of
increased demand on the one hand and innovations in the field of
medical technology on the other brings with it considerable
potential for growth – and therefore costs. Innovative products
with a clear competitive advantage should be among the winners in
such an environment.
Positioning for future investment performance in the health
sector
The healthcare sector represents an important part of the overall
investment market. According to the finance and IT sector, it is the
third-largest investment area (13.7% of the S&P 500 Index, A.G.
Edwards, 2004). In terms of the USA, the investment market for
the health sector is currently running at around USD 2,500 billion
(sources: Pacific Growth 2005, Yahoo Finance 2005, internal
calculations). In principle, the momentum of growth inherent in the
health sector also offers a good basis for above-average investment
performance in the future. However, in the light of the cost
problems, an increasingly selective strategy will be required in this
respect. The requirements for a successful stock picking strategy
will therefore increase in future.
Sub-sectors of the health sector
The health sector is not a single uniform area; rather it is
subdivided into different sub-sectors with different growth
dynamics. A broad distinction can be drawn between the following
three areas:
1) Products, i.e. drugs (pharmaceutical, biotech, speciality
pharmaceutical) and medical technology procedures or
applications,
2) Services, e.g. health insurance companies and the drugs trade,
3) Facilities, e.g. hospitals and diagnostics centres.
As investment areas, these different sectors within the health care
investment market have very different weightings and future
expectations.
Pharma
45%
Biotech
12%
Emerging Pharma
13%
Services
14%
Medtech
16%
Fig. 2: Weighting of the health care sub-sectors in the health
care investment market; Source: A.G. Edwards, Morgan
Stanley, internal calculations.
The Mid / Small Cap segment as a neglected investment area
In addition to the choice of sub-sectors, the size of a company,
measured against the market capitalisation, is crucial to the success
of an investment. In the USA, the healthcare sector includes 643