What’s driving the healthcare sector?

Over the last few years, the healthcare sector has changed in two main ways.

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First, “we’re seeing an inflection point in innovation [since] some of the tools and techniques we have available now are better than what we’ve seen in the past,” says Ann Gallo, senior vice-president and partner at Wellington Management Company in Boston, Massachusetts. She co-manages the Renaissance Global Health Care Fund.

In particular, she finds accomplishments such as the sequencing of the human genome and significant advances in immune oncology have elevated the sector.

Read: How to choose top healthcare stocks

Further, says Gallo, “we’re seeing the bar [rising] for companies that are introducing new products,” given there’s greater focus on the cost and value of doing so.

In the past, for example, competitors could more easily introduce generic drugs that were only modestly different than existing products in terms of their effects and prices. But “going forward,” she adds, “the [U.S.] healthcare system is requiring manufacturers of drugs and devices to demonstrate [more than the] clinical efficacy” of new products.

Read: The world’s best healthcare is in…

Now, manufacturers also have to demonstrate the value of these drugs and, more specifically, “that [they’re] meaningfully better than current options.”

That’s a positive for investors since greater regulation will “create a much more practiced environment for specialist investment. Some companies will […] be able to thrive in this new world and some companies won’t,” and investors will be able to distinguish between those groups more easily.

Read: 3 reasons to invest in healthcare

An aging population

On one hand, having an aging population is a plus since it means the demand for healthcare services will continue to rise.

Read: Address clients’ fear of aging

But it’s a mistake to assume that “as people age, we’re going to [be able] to spend more on healthcare” broadly, says Gallo. “We don’t have infinite money to spend, so by blindly investing in healthcare companies and [broad indices], investors aren’t going to be able to [actively] pick the winners and the losers” of the sector.

She suggests people look for companies that provide quality services, and those that are innovative through offering products and technologies that are better than those currently available.

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