Introduction to Healthcare Investing

Written by Bryan Li, Editor

Healthcare is one of the most significant and crucial industries in the global economy, allowing for substantial financial returns for investors. In 2022, healthcare investment spending reached $4.5 trillion, 17.3% of the United States' Gross Domestic Product (GDP). (Henricks & Conde, 2024) Healthcare investing is a broad term that covers investing within the biotechnology, pharmaceutical, medical device, healthcare service/facility, and healthcare IT markets. (Brian, 2024) Most healthcare companies fall into two categories: pharmaceuticals, biotechnology, and life science; and healthcare equipment and services. These categories are drastically different, highlighted by how well-differing healthcare companies performed during the COVID-19 pandemic. Companies falling into pharmaceuticals, biotechnology, and life science had substantial high returns, especially key Covid-19 vaccine producers Pfizer, Moderna, and Johnson & Johnson. However, healthcare equipment and services companies performed drastically differently with non-essential surgeries and producers, such as cosmetic surgery, did not run during the pandemic. This article will review what healthcare investing is, its advantages and disadvantages, and past performance and future trends.

Healthcare investing is seen as recession-proof, meaning it will remain relatively stable throughout uncertain periods. Furthermore, healthcare investments are seen as a defensive stock. (Chen, 2024) Defensive stocks typically provide consistent dividends and stable earnings regardless of the state of the overall stock market. These stocks offer the advantageous benefit of long-term gains and lower risk compared to other stocks. Healthcare is seen as a defensive stock as it performs better during recessions and is an essential good and service. A key example would be Johnson & Johnson, a pharmaceutical conglomerate known for its Covid-19 vaccine and many household products such as Benadryl (allergy medication), Band-Aid, and Reactine (allergy medication). Johnson & Johnson's economic performance perfectly shows how healthcare investing benefits those looking for minimal risk. Johnson & Johnson's ability to protect itself against economic challenges, such as COVID-19, further showcases how healthcare stocks can bring stability and reassurance to someone's healthcare portfolio.

Although healthcare investing may seem like an ideal option for someone to add to their investment portfolio, some disadvantages may cause disruptions in someone's financial return. Across the world, healthcare is highly regulated by governments in developed countries, such as Canada and the United States. Government agencies such as Health Canada, Canada's federal body in charge of the drug approval process, can reject drugs, devices, and treatments, which can completely devastate a company's economic performance. (Henricks & Conde, 2024) In the past few months, parties have tried to change the rules for investments within the healthcare sector. Across the world, new regulations have been proposed that call for increased oversight of healthcare investment transactions and companies backed by investors. (Joseph & Sherer, 2024) From an investor standpoint, this leads to increased compliance costs, slower transaction times, and reduced flexibility for investors. Increased compliance costs result in lower profit margins, resulting in a smaller return on investment (ROI) for more prominent investors. Slower transaction times result in longer approval processes for investment transactions, which may slow the growth of innovative healthcare startups and result in slower research and development, meaning investors must wait longer for potential returns. Reduced flexibility imposes limitations that can hinder investors' control over their investments, which may deter those who prefer more flexible investment structures.

Figure 1: Venture Capital Dollar and Deals by Healthcare Sectors (Spencer et al., 2024)

The graph provides a visual summary of all the investments in the healthcare sector across the United States, the United Kingdom, and the European Union. As we can see from the graph, from Q3 2023, the graph showcases a recovery from 2022 in both the number of deals and the total funding amount, reaching 715 deals in Q2 2024. This resurgence in deals reflects the continued confidence in healthcare investing, particularly considering the emerging artificial intelligence (AI) sectors in healthcare, personalized medicine, and digital health platforms. (Spencer et al., 2024) As we approach 2025, healthcare investments remain competitive in the investment market. The graph showcases forming a healthy foundation for a strong private market for 2025. In Canada, healthcare investing is a key player in the 2025 investment market due to the aging population, consistent demand for healthcare services, technological innovation, and supportive government policies. Key stocks to look for include those in digital healthcare services and healthcare logistics, such as WELL Health Technologies (TSX: WELL), an outpatient medical clinic conglomerate and telehealth solutions provider; and Andlauer Healthcare Group (TSX: AND), a medical supplies and pharmaceuticals logistics and transportation company. (Legate-Wolfe, 2024)

Healthcare investing continues to be one of the most stable and lucrative sectors in the investment sector. It stays resilient during economic uncertainty and has strong demand, making it a strong option for those seeking low-risk and steady returns. Despite the regulatory challenges, the sector's constant growth and continued technological innovation allow for a strong foundation to be made for future investments. As we approach the new fiscal year, healthcare continues to be a promising area for investors, offering a unique opportunity to align with their financial goals while providing advancements in the healthcare industry.

Works Cited

Brian, M.-. (2024, April 10). Healthcare Investment Banking: Drivers, Valuations, Deals & Exits. Mergers & Inquisitions. https://mergersandinquisitions.com/healthcare-investment-banking-group/#:~:text=Healthcare%20Investment%20Banking%20Definition:%20In,care%2C%20and%20medical%20device%20companies

Chen, J. (2024, May 2). Understanding Defensive Stocks, Pros & Cons, and Examples. Investopedia. https://www.investopedia.com/terms/d/defensivestock.asp#:~:text=Key%20Takeaways,considered%20to%20be%20defensive%20stocks

Henricks, M., & Conde, A. (2024, September 9). Things to consider before investing in the health care sector. SmartAsset Advisors. Retrieved December 30, 2024, from https://smartasset.com/investing/investment-in-health-care

Joseph, A., & Sherer, J. (2024, August 15). Increased scrutiny of private investment in health care: Key insights for health care innovators and investors. Orrick, Herrington, & Sutcliffe LLP. Retrieved December 30, 2024, from https://www.orrick.com/en/Insights/2024/08/Increased-Scrutiny-of-Private-Investment-in-Health-Care-Key-Insights

Legate-Wolfe, A. (2024, December 24). Healthcare sector: Top picks for Canadian investors in 2025. Yahoo Finance. Retrieved December 30, 2024, from https://ca.finance.yahoo.com/news/healthcare-sector-top-picks-canadian-215000236.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAABnzrW1aILUSZExaQbaqA9NPgvguV1xgn2F02rifr2XyJGJ1k3ghaihee_C1ARAhfbWfDSgQPaFCbLnsX1ToyE7ZUly7IfB4n2krP9FF76Gtlww16o6JoBLi8_bKwrV2iUUkdFTYQgZpPz6S-s_Il0Rkg4-4wCBnPKcM9pZgV3gr

Spencer, J., Bousleiman, R., Frank, K., Lamarre, T., & Lennox-Miller, A. (2024). Healthcare Investments and Exits Mid-Year Report. Silicon Valley Bank. Retrieved December 30, 2024, from https://www.svb.com/trends-insights/reports/healthcare-investments-and-exits/