MARKET MINUTE FROM BLACKROCK FUNDAMENTAL EQUITIES

Why the outlook for healthcare stocks just got brighter

Dec 7, 2020

Amid optimism for a COVID-19 vaccine and greater clarity around the U.S. election, Dr. Erin Xie, portfolio manager of the BlackRock Health Sciences Opportunities Fund, discusses two timely reasons to consider healthcare stocks.

The healthcare sector has demonstrated its prized performance resilience in 2020 - a year most of us are eager to forget but one that has revealed new reasons to stick with healthcare stocks.

Newfound policy stability

We entered 2020 with prospects for sweeping healthcare policy and drug pricing reform casting a cloud over the sector. Fast forward 12 months and the policy backdrop is looking fairly benign for healthcare stocks.

The full results of the U.S. elections are not yet set in stone, but with a likely Republican-controlled Senate and smaller Democrat majority in the House, we view dramatic changes in health policy as unlikely. President-elect Biden will not have the votes to press for a more progressive agenda, and his key objective to expand Affordable Care Act coverage would likely face a similar fate. The incoming president’s position on drug pricing reform is also less severe than that of President Trump.

Rather than any large-scale transformation of the healthcare system, we see potential for only incremental changes – those achievable through a combination of executive orders and Medicaid/Medicare authority. Add to this the immediate need to focus on pandemic response, and that leaves little political capital to take on complex health policy changes, particularly as hospitals confront COVID-19 challenges and vaccine development and dissemination remain a priority. On balance, a largely stable policy picture should be a positive for investors in the healthcare sector.

Innovation amplified

Beyond the benign policy backdrop, the world’s shared battle against the coronavirus has showcased the innovation prevalent across the healthcare sector. The sequence of COVID-19 was known soon after the novel virus was discovered, and the spike protein was quickly identified as the lynchpin for vaccine design. All of this helped to attract capital to the pharmaceutical industry. It wasn’t long before more than 150 vaccine programs were underway, with the extraordinary news of the first viable candidates reported in November - just eight months from when the global pandemic was declared.

The coronavirus crisis also accelerated innovation in healthcare services, particularly in telemedicine and in-home care. A six-fold increase in the use of telemedicine services in the first half of 2020 is just the start of what we see as an enduring trend. Hospitals and physicians are increasingly investing in telehealth capabilities, and consumers are warming to this model of care. We see ample room for further adoption after what had been a slow start prior to the pandemic.

Telemedicine seeing healthy growth

Chart: Telemedicine Growth

Source: BlackRock, as of August 2020. Search data from Google Trends. Web traffic, app downloads and active users (Android only) from SimilarWeb. “Pre” period represents January-February 2020 year-over-year growth rates. “Post” (“now”) period represents April-June 2020 year-over-year growth rates.

Meanwhile, business models that provide services away from hospitals, such as outpatient surgical centers and in-home care, should continue to gain momentum. Penetration is still relatively low, and many types of care can be managed more affordably at home rather than at pricier provider sites such as hospitals. This, we believe, speaks to the future of healthcare: a model focused on quality and value over volume, helping to manage increased healthcare costs.

Structural tailwinds firmly in place

We have always focused on innovation in the BlackRock Health Sciences Opportunities Fund, and the past year has shone a bright light on the remarkable progress that is possible through scientific discovery and innovation.

Yet innovation is not the only long-run growth driver for the healthcare sector. Aging populations globally, along with increased healthcare spending from emerging market economies, are also key long-term tailwinds. As innovation continues to advance, people around the world are living longer. And with healthcare costs roughly tripling after age 65, aging demographics worldwide mean increased healthcare spending for years to come.

Ultimately, a stable outlook from a policy perspective should allow greater focus on industry fundamentals and innovation  and offer attractive opportunities for investors in the healthcare space. The COVID-19 crisis has also revealed the industry’s tremendous capacity to innovate and advance, and should give investors even greater confidence that the healthcare sector is brimming with long-term investment potential.

Erin Xie
Portfolio Manager
Erin Xie, PhD, Managing Director and portfolio manager, is the head of the Health Sciences team, part of BlackRock's Active Equity Group.
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