Radical innovations revealing real prospects in health care

Health care stocks have struggled since the pandemic amid rising costs and falling revenues, but a wave of innovation is transforming the sector’s prospects. A new generation of treatments and technologies are coming to market that deliver radical outcomes, establishing the conditions for what we believe will be a golden age of health care.

The emergence of GLP‑1 drugs targeted at obesity and diabetes has been a seismic development. The investment implications of GLP‑1s are large, not just for the earnings potential of drug developers, but across every part of the health care ecosystem and the wider economy. So far, however, this has not translated into sectorwide outperformance: All health care segments in the S&P 500 have underperformed the broader index over the past two years, and the weighting of the overall health care sector within the index was at its lowest level in 10 years at the end of October (Figure 1). History shows that following periods of declining returns, the weighting of health care within the S&P 500 has typically fallen before recovering.

Health care weighting in S&P 500 is lowest in 10 years

(Fig. 5) All segments in the sector have underperformed the broader index

Next twelve month relative return data end October 31, 2023 and S&P 500 Index data end October 31, 2024. The relative return shown on the y‑axis is that of the healthcare sector within the S&P 500 Index vs. that of the index as a whole.
Past performance is not a reliable indicator of future performance. Next 12 months are subsequent returns to a given point in time and are not a projection of any return.
Source: Standard & Poor’s, via FactSet (see Additional Disclosures).

Leading GLP‑1 manufacturers have still benefited

Despite declining valuations across health care segments, barriers to entry are high in the GLP‑1 space. The leading manufacturers have gained a competitive advantage by amassing huge amounts of clinical data and building production capacity, and they are also developing next generation drugs that are likely to be better than those currently available. These firms are spending billions of dollars on capital expenditure and research and development in aiming to maintain their dominance.

One of the most important innovations is in small‑molecule GLP‑1s that can be taken in pill form rather than the currently available injection. Due to capacity constraints, there will never be enough injectable drugs to reach the number of people who need them, which means that GLP‑1s in pill form are needed to address the global market in obesity treatments.

The wave of health care innovation is not just limited to GLP‑1s, however. Technological developments are leading to major breakthroughs in areas such as AI‑led cancer screening and robotic surgery, while therapeutic innovations are poised to accelerate demand for companies that sell the necessary bioprocessing production equipment.

Lower rates and inventory normalization should bring timely boost

Rising interest rates in 2022/2023 hit the earnings potential and valuations of biopharma stocks particularly hard. The return to a lower rate environment—and, with that, funding—should be a major boost for the sector. Further support could come from post‑pandemic inventory normalization as the industry returns to more stable demand patterns.

Elsewhere, managed health care organizations are adapting to external cost pressures and technological advances by delivering more value‑based care (where providers are paid based on patient health outcomes) and remote care. They are also increasingly using AI and machine learning to predict patient health outcomes and guide decision‑making.

Investors seeking to benefit from these changes will need to look beyond traditional financial analysis and gain a deeper understanding of the scientific developments underpinning them. For those able to do this, the extraordinary innovation taking place across many health care sectors, combined with the current low valuations available, provide a compelling opportunity.

Key takeaway
A new generation of treatments and technologies are paving the way for what could be a golden age in healthcare.

Nabil Hanano Associate Portfolio Manager, Global Focused Growth Equity Strategy

Nabil Hanano is an associate portfolio manager of the Global Focused Growth Equity Strategy in the U.S. Equity Division. He is an Investment Advisory Committee member of the US Small-Cap Growth Equity, Global Industrials Equity, Europe Equity, and Global Focused Growth Equity Strategies and a vice president of the T. Rowe Price International Funds. Nabil is a vice president of T. Rowe Price Group, Inc., and T. Rowe Price International Ltd.

This document reflects the views of the respective associates of T. Rowe Price Associates, Inc., and certain of its investment advisory affiliates.

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