Ageing population: living longer or better?

30 May 2019

Last week we showed how increased life expectancy is creating a significant population of older individuals – currently there are nearly a billion people over sixty years old, which is set to double in the next thirty years.

This demographic trend will boost the global healthcare sector; injecting a double dose of growth as spending increases first to extend longevity more widely and then as more people living longer incur higher healthcare costs.

Here, we look at how investors can position themselves in healthcare – more specifically through companies providing solutions to address chronic and age-related illnesses.

The growing burden of chronic diseases

Historically the leading causes of death were infectious diseases and acute illness – which unfortunately still remain dominant in many developing countries. However, age-related and chronic diseases are becoming the primary driver of both mortality and healthcare costs globally.

The World Health Organisation estimated, of the 56.9m deaths in 2016, heart disease, stroke and pulmonary disease were the world’s biggest killers. Combined these account for about one in three deaths¹.

Moreover, the next set of non-communicable causes of death include dementia, cancer and diabetes. All these chronic diseases are age-related and more prevalent in the elderly.

These diseases, as well as many other illnesses – such as osteoporosis, arthritis, hearing loss, dental care, incontinence – will all contribute to healthcare costs.

Healthcare spending is set to soar to 12% of gross domestic product (GDP) in 2060 in developed economies from 6% of GDP in 2006-2010, and to triple in emerging markets². Spending on medication alone in the US is expected to double to $900bn by 2050³.

This is most acutely evident in developed countries, such the US, where healthcare spending per person roughly doubles after the age of 65, and then more than doubles again in those over 85.

Predicting, preventing and treating chronic diseases is key to ensure we are not just living longer, but better.

Investment opportunities

Companies that can provide solutions to age-related and chronic diseases will be well-positioned to benefit from rising life expectancy trends – either directly providing the medications or developing tools and technologies for these medicines.

Pharma and biotech

Pharmaceutical and biotech industries produce the medicines that treat these chronic and age-related diseases. Their market is globally set to exceed $1.5tn by 2023 ($1.2tn in 2018). This growth is driven both by the developed, notably the US, and so-called “pharmerging markets”, developing countries where pharmaceutical use is growing rapidly. The largest market is China which is forecast to spend $140-170bn by 2023⁴.

While there is significant overlap between pharma and biotech, there are notable differences in these industries beyond how medicines are produced⁵. Investors should consider how the structure and risks of these industries operate.

Generally, biotech companies engage solely in research and development (R&D) of medicines, using biotechnology to recreate complex cellular functions for a specific treatment purpose. This requires high operating costs for research, development, and many years of testing to complete. The result tends to be a blockbuster or blowout; so these companies have a high risk-return profile.

In contrast, pharmaceutical companies tend to engage across a full array of activities from R&D to manufacturing and marketing medicines. They aim to have a steady flow of income from current drugs while maintaining R&D to produce similar or new products. For investors, successful pharma companies can offer more stable return profiles as long as the pipeline has the right line-up of new products.

Firms that have strong pipelines of drugs, particularly at the commercial stage, in areas such as diabetes, oncology and cardiovascular will be the ones best positioned to benefit from ageing population trends.

Drug development

Companies providing the tools and technology to support the discovery and development of drugs are another notable investment opportunity. Here, the burgeoning field of artificial intelligence (AI) has the potential to accelerate drug discovery, trial and testing – which is the longest and costliest component of the R&D process.

The AI health market is already seeing explosive growth. The market is expected to reach $6.6bn by 2021, up tenfold on its $600m level in 2014. Additionally, Accenture predicts that AI healthcare applications may result in annual savings of $150bn by 2026⁶. More than one-third of senior executives at healthcare providers reported they were investing in AI, machine learning and predictive analytics going into 2018⁷.

For investors, diagnostic specialists capitalising on increased patient testing will provide exposure to this growing market. As well, technology companies, with their vast data and AI capabilities, are investing significant resources in the healthcare sector. As pioneers of deep learning in medical research, they are using significant financial and technical capabilities to enter this market – often targeting ageing itself rather than diseases related to ageing.

Improving health span, not just lifespan

In the end, people don’t just want a longer life, they want a healthier one. The companies offering this elixir will be well-placed to benefit from the megatrend of an ageing world that spends more on healthcare that helps prevent, diagnose, and treat chronic illnesses and diseases. This can benefit both society and investors.

Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.

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