Futu Strategy Session | Seizing Structural Opportunities in the Healthcare and Pharmaceutical Market

As the world enters the post-pandemic era, the pharmaceuticals, healthcare, and broader health markets have further captured investors' attention. What are the main factors driving the long-term development of the entire market? Which innovative fields hold the most potential? How can one optimize investment allocation within this sector? Lang Yuanlin, a senior analyst and fund manager at Fidelity International, was invited to Futu's live broadcast to share insights on the structural opportunities and industry innovations within the healthcare and pharmaceutical sectors.

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Question: How do you view the overall fundamentals of the healthcare, pharmaceuticals, and broader health sectors?

We believe that the global healthcare, pharmaceuticals, and broader health industries present excellent investment opportunities and prospects. As the COVID-19 pandemic enters its third year, people are increasingly recognizing how closely healthcare and pharmaceuticals are intertwined with their daily lives. The pharmaceutical industry is omnipresent in everyday life and has become an indispensable part of society as a whole. Whether it is infants, young adults, or the elderly, the demand for healthcare is growing, and awareness of health is rising in tandem.

Notably, the aging population is driving long-term growth in the pharmaceuticals and healthcare industries. By 2050, the global population aged 65 and above is projected to reach 1.5 billion. The demand for pharmaceuticals and healthcare services will steadily increase, with significant unmet medical needs emerging in various fields. Thus, the demographic dividend brought about by changing population structures serves as a true driver for the industry's sustained development.

Q: What are the new research directions and trends in the pharmaceuticals industry in the future? Which diseases and treatment areas can be focused on?

There is no doubt that the COVID-19 pandemic has brought new attention to the pharmaceuticals industry. We believe that global pharmaceuticals and medical consumption will continue to grow, government investment and expenditure in the healthcare industry will keep increasing, and the proportion of pharmaceutical spending as a percentage of GDP is expected to rise further.

In addition, due to improvements in living standards and changes in lifestyle, demand for medical and pharmaceutical products is also evolving. With continuous progress in medicine, the human mortality rate has dropped significantly, and life expectancy has further increased. Meanwhile, diseases have evolved alongside the world, and the leading cause of death today has shifted from acute infectious diseases to cardiovascular and cerebrovascular diseases and cancer.

Breakthrough developments in new drug research globally will mainly concentrate in three therapeutic areas: cancer, Alzheimer's disease, and obesity.With global economic development and wealth accumulation, the number of cancer cases shows a high correlation with per capita GDP. Alzheimer’s disease significantly reduces the quality of life of patients and imposes a heavy disease burden on society. Obesity increases the risk of various diseases, such as hypertension, hyperlipidemia, diabetes, and heart disease.

Q: How to interpret the latest innovation trends in the pharmaceuticals and healthcare sector?

For the broader pharmaceuticals and healthcare industry, R&D has always been a top priority, and innovation will continue to drive a new round of product development. Overall, the pharmaceuticals industry is one of the sectors with the highest R&D spending, and innovation can be divided into revolutionary innovation and incremental innovation.

Future-oriented revolutionary innovations will focus on precise gene therapies, robotic surgery, cancer targeted treatments, and genetic sequencing. Incremental innovations, on the other hand, will focus on minimally invasive surgeries, continuous glucose monitoring systems, high-tech assisted hearing systems, and daily oral medications for rheumatic diseases.

Q: How is the healthcare and pharmaceuticals sector related to sustainable development? What are the key issues?

The healthcare and pharmaceuticals industry is closely linked to the sustainable development of society. Sustainable development is one of the core principles upheld by this industry. Among the 17 Sustainable Development Goals proposed by the United Nations, the third goal is 'Good Health and Well-being,' which aligns perfectly with the healthcare and pharmaceuticals industry's objective of improving public health.

Major issues regarding the sustainable development of the entire industry primarily focus on the accessibility of medicines, including topics such as medical insurance, drug pricing, logistics, warehousing, and transportation. Additionally, improving health outcomes and providing cost-effective solutions for healthcare systems remain long-term focal points for the industry.

Q: How should investments in the healthcare and pharmaceuticals sector be allocated in the post-pandemic era amid risks of economic recession and interest rate hikes?

Despite fluctuations in global equity markets, the global healthcare and pharmaceuticals sector has strong defensive characteristics and can offer favorable risk-adjusted returns. Historically, over the past two decades, healthcare and pharmaceuticals have delivered excess returns to investors. Especially during periods when the broader market is in decline, the healthcare sector often trends in the opposite direction.

The reasons behind this include the relatively inelastic demand for healthcare, as pharmaceutical companies typically possess robust cash flows and healthy balance sheets. Moreover, most healthcare and pharmaceutical firms are less sensitive to inflation because raw materials account for a relatively small proportion of operating expenses, while profit margins remain at healthy levels, giving them stronger inflation-resistance capabilities.

When investing in the healthcare sector, it is essential to adopt a bottom-up stock selection approach, taking into full consideration factors like product innovation, long-term corporate planning, sustainability strategies, cash flow, and balance sheets to capture potential explosive growth opportunities.

Q: What is the development status and investment potential of China’s healthcare and pharmaceuticals industry?

In the long term, China's healthcare and pharmaceuticals industry holds significant potential, largely driven by demographic structure and population aging. The proportion of GDP spent on healthcare in China still has substantial room for growth. With the increase in per capita disposable income, the prevalence of chronic diseases will also rise gradually, further driving healthcare demand.

From the supply side, ongoing healthcare system reforms are pushing pharmaceutical companies to transition from generic drug markets to innovative drug markets. China's healthcare regulatory authorities, through measures such as bulk procurement of drugs and other reforms, are channeling more resources and medical insurance funds towards encouraging the development of innovative drugs. These efforts will ultimately help companies enhance their innovation capabilities, laying the foundation for future growth.

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