Health­care Is More Than Just Pharma: Which Sub-Sectors Investors Should Know

Health­care is much more than just the pharmaceu­tical industry. From medical techno­logy to health­care services and digital solutions, the sector offers a wide variety of business models. But how do these differ from an investor’s perspec­tive? Here is an overview of the key subsec­tors, their growth drivers, and the associated oppor­tu­ni­ties and risks.

Health­care as an Invest­ment Universe: More Than Just Medicines

In Switz­er­land in parti­cular, health­care as an invest­ment theme is often equated with the pharmaceu­tical sector. This is under­stan­dable: With Roche and Novartis, two of the world’s largest pharmaceu­tical compa­nies are practi­cally on our doorstep and have been among the heavy­weights of the Swiss stock market for decades.

However, the health­care invest­ment universe is much broader. Accor­ding to the inter­na­tio­nally recognized GICS classi­fi­ca­tion, the sector comprises six subsec­tors: Pharmaceu­ti­cals, Biotech­no­logy, Health Care Equip­ment & Supplies, Health Care Provi­ders & Services, Life Sciences Tools & Services, and Health Care Techno­logy.

In the MSCI World Health Care Index, the pharmaceu­tical and biotech­no­logy sectors together account for about 64% of market capita­lization. However, investors should not overlook the remai­ning 36%. This segment includes business models with risk, growth, and return charac­te­ri­stics that are, in some cases, signi­fi­cantly diffe­rent and often comple­men­tary.

US-Gesundheitsausgaben-2024-nach-ausgewaehlten-Bereichen-T-1

A look at health­care spending reveals just how broad the sector really is

The Centers for Medicare & Medicaid Services (CMS), an agency of the U.S. Depart­ment of Health and Human Services, provides parti­cu­larly detailed data on the health­care market. In 2024, appro­xi­m­ately $5.3 trillion was spent on health care in the U.S., accoun­ting for about 18% of total economic output.

Of this total, only 9% was attri­bu­table to prescrip­tion medica­tions dispensed through pharmacies. Signi­fi­cantly larger cost catego­ries were hospital treat­ments at 31% and medical and clinical services at 21%. Other major catego­ries included long-term care facili­ties, dental care, outpa­tient care, and medical devices.

Looking beyond the United States also reveals a long-term struc­tural trend: As prospe­rity increases, per capita health care spending generally rises as well. In emerging econo­mies in parti­cular, the expan­sion of health care services is there­fore likely to generate additional demand in the long term.

Health­care extends far beyond the pharmaceu­tical industry

The pharmaceu­tical and biotech­no­logy industries develop thera­peutic agents. Tradi­tio­nally, the term “pharmaceu­tical company” has prima­rily referred to compa­nies whose drugs are based on chemically synthe­sized active ingre­di­ents. Biotech­no­logy compa­nies, on the other hand, develop thera­pies based on biolo­gical systems, such as cells, proteins, or genes.

However, this distinc­tion is becoming incre­a­singly blurred. Roche, for example, is now both one of the world’s largest pharmaceu­tical compa­nies and one of the leading biotech­no­logy compa­nies.

Health Care Equip­ment & Supplies (MedTech) includes, among other things, implants, surgical instru­ments, diagno­stic devices, diabetes techno­lo­gies, and surgical robots. Swiss examples include Strau­mann, Sonova, and Alcon.

A defining feature of the medtech industry is that innova­tion often occurs incre­men­tally: an implant or surgical system is conti­nuously improved over many product genera­tions. It is precisely this technical and mecha­nical nature of the products that creates ongoing oppor­tu­ni­ties for innova­tion. Our experi­ence shows that not only ground­brea­king develo­p­ments but also the conti­nuous refine­ment of existing medical techno­logy is a key growth driver for the industry.

Health Care Provi­ders & Services includes, among others, hospi­tals, nursing care provi­ders, labora­tory service provi­ders, distri­bu­tors, and health insurers. A Swiss example is Galenica, a pharmaceu­tical distri­butor and operator of pharmacies. Inter­na­tio­nally, this segment also includes major health insurers and hospital groups.

Factors such as capacity utilization, personnel costs, compen­sa­tion systems, and opera­tional effici­ency play a much greater role here than, for example, patents or clinical trials.

Life Sciences Tools & Services are largely suppliers to the biophar­maceu­tical industry. They provide instru­ments, consu­ma­bles, and research and produc­tion services to pharmaceu­tical and biotech­no­logy compa­nies. In Switz­er­land, for example, Lonza, Bachem, and Tecan are part of this sector.

Health­care techno­logy encom­passes software, data platforms, and IT services speci­fi­cally designed for doctors, hospi­tals, and other health­care compa­nies. One inter­na­tio­nally recognized example is Veeva Systems.

A distinc­tive feature of the health­care sector remains the high degree of fragmen­ta­tion and the sensi­ti­vity of medical data. It is precisely this that makes digitization both parti­cu­larly attrac­tive and challen­ging.

Same long-term drivers, but diffe­rent business models

Almost all health­care sectors benefit in the long term from several struc­tural growth drivers:

  1. Popula­tion Aging: As people age, many health condi­tions become more preva­lent, and with them, the need for medical treat­ment increases.
  2. Changing Lifestyles: Obesity, diabetes, and other chronic diseases are incre­a­sing the need for treat­ment world­wide.
  3. A growing middle class in emerging markets: As prospe­rity rises, access to medical care improves, as do people’s finan­cial ability to seek health services.
  4. Digita­lization and innova­tion: New medica­tions, medical techno­lo­gies, and digital solutions make it possible to treat diseases more effectively—or for the first time at all—and make existing thera­pies more efficient.

Despite these shared growth drivers, the invest­ment charac­te­ri­stics of the indivi­dual subsec­tors differ signi­fi­cantly.

Investment charasteristics of selected healthcare subsectors

A successful drug, for example, can generate billions in revenue. At the same time, expiring patent protec­tion, compe­ting products, or disap­poin­ting clinical trial data can signi­fi­cantly impact the economic value of a pharmaceu­tical or biotech company—and thus its stock price as well.

In contrast, for a medtech company, growth is often spread across a wide range of products, product genera­tions, and medical proce­dures. At the same time, a successfully estab­lished system can create long-term compe­ti­tive advan­tages, such as through a large installed base, training, software, or recur­ring consu­ma­bles.

Life sciences compa­nies, in turn, are more heavily depen­dent on the research and invest­ment budgets of their pharmaceu­tical and biotech clients. For hospi­tals and health insurers, on the other hand, factors such as personnel costs, capacity utilization, and regula­tory reimbur­se­ment systems play a greater role.

Because of these diffe­ring business models and risk drivers, the indivi­dual health­care subsec­tors can perform very differ­ently on the stock market over the years.

Healthcare fullscreen Finanz-Ratgeber

What should investors look out for?

One of the most common mistakes is to view health­care as a homoge­neous invest­ment theme. While a pharmaceu­tical company, a manufac­turer of cardiac cathe­ters, a health insurer, and a supplier of labora­tory instru­ments all belong to the health­care sector, their business models and finan­cial charac­te­ri­stics differ signi­fi­cantly.

It is there­fore worthwhile for investors to ask three specific questions about every company:

  • What factors influence growth?

  • How predic­table are revenue and cash flow?

  • What events could funda­men­tally change the invest­ment thesis?

For us, that is precisely the key point: Health­care is too broad an invest­ment universe to be reduced to just the pharmaceu­tical sector.

The pharmaceu­tical sector offers high margins and signi­fi­cant oppor­tu­ni­ties for innova­tion, but it also involves patent and develo­p­ment risks. MedTech compa­nies can build attrac­tive and highly predic­table business models based on installed systems and recur­ring consu­ma­bles. Life Sciences Tools enable parti­ci­pa­tion in research and innova­tion without bearing the full clinical risk of a single drug. Provi­ders & Services and Health Care Techno­logy, in turn, contri­bute diffe­rent revenue drivers and risk profiles to a portfolio.

Diver­si­fi­ca­tion within the health­care sector there­fore does not simply mean investing in multiple compa­nies. Rather, the key is to combine diffe­rent business models, growth drivers, and risks.

Conclu­sion: Take a nuanced approach to health­care stocks

Health­care is much more than just pharmaceu­ti­cals. The sector encom­passes an excep­tio­nally broad range of business models.

It is precisely this breadth that makes the health­care sector parti­cu­larly exciting, but it also requires in-depth exper­tise. Those who under­stand the various business models as well as their scien­tific, regula­tory, and economic drivers can make informed assess­ments of oppor­tu­ni­ties and risks.

Learn more about Tareno’s exper­tise in the health­care sector on our website.

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Author

Raphael Oesch
Raphael Oesch
Fund Manager
+41 44 283 28 00 E-Mail
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