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Jean Hynes, global industry analyst with Wellington Management Company.
What is the outlook for U.S. healthcare stocks in 2019? The fundamental backdrop of U.S. healthcare company fundamentals is really quite strong. If you think about the four major sub sectors of healthcare—biotech and pharmaceuticals, healthcare services and medical technology—the underlying dynamics of all of those are on very solid footing.
In biopharmaceutical—combined biotech and pharmaceuticals—we are in the Renaissance age of medicine, and so the amount of new innovation that is coming through is more robust than it’s been in my 25-year career at looking at the sector, so that remains on an uptrend.
We are seeing very solid volume growth that is supporting life science tool companies, medical procedures that impact medical devices, and continued growth of the publicly traded managed care companies, which are taking share in government programs, such as Medicare and Medicaid.
Really, when you take a step back, there are very few sectors of healthcare that are facing weaker or fundamental pressures. Two that I might voice have been the generic drug industry where there’s been a lot of pressure on generic drug prices, and that has also impacted parts of the distribution, or supply chain. But besides those two sectors, the fundamentals are quite robust.
Now, the risk to the sector would be any dramatic change in the profitability of biopharmaceuticals, and there are a number of measures underway that could impact how drugs are reimbursed in the U.S. system. We think, overall, these will be neutral to the biopharmaceutical companies themselves, but it’s really something we’re watching closely.
The most important thing for our process is that innovation is paid for around the world, and that innovation in the U.S.—the most important market for these companies—remains the ability to price your drugs for the value they provide for patients.
The healthcare services sector is mainly a U.S. sector, so there are very few stocks that are traded outside the U.S. But [in] the biopharmaceutical sector and the medical technology sector, there are companies both in Europe, in Japan, and China.
The one real trend to note would be the dramatic change happening to China healthcare. Right now, the percent of Chinese GDP to spend on healthcare is low but it’s growing, and the Chinese government has made a number of changes to rules and regulations over the last few years that really do help the formation of a robust medical technology, local medical technology as well as local pharmaceutical market.
Quite interestingly, on top of that, we are seeing the early stages of the formation of a biotech industry in China, which could over time rival parts of the U.S., and so that’s something we’re watching quite closely.
What you are seeing is volume growth around Europe with some mechanisms to try to control pricing. The European market remains pretty stable in terms of its dynamics, the same kind of dynamics seen for the past 10 years.
I would say Japan is changing more. As Japan moves to a society where there’s a greater percent of the population over 75, the volume growth in the Japanese healthcare market is accelerating, and the Japanese government is using lower prices to control that spending.
But it seems like we’re in the early stages of structural changes in the Japanese market, in terms of how drugs are reimbursed, what procedures are reimbursed, and how Japanese patients interact with the healthcare system.
Again, over the next decade, as the Japanese government attempts to deliver really high-quality healthcare to an aging population, and how reimbursement or how things will change, I think it’s going to be on an accelerating pace.