This article was originally produced in conjunction with Boring Money for their Investment Trust Hub.

Some information contained herein has been obtained from third party sources and has not been independently verified by Polar Capital. Neither Polar Capital nor any other party involved makes any express or implied warranties or representations.

The healthcare sector has had, to put it lightly, an eventful few years. The Covid-19 pandemic thrust healthcare stocks into the spotlight almost overnight and companies including AstraZeneca, BioNTech and Pfizer quickly became household names. While worldwide coverage of the vaccine race brought healthcare advancements to the forefront of news cycles, sales in hand sanitiser and PPE soared as the general public adopted more stringent personal hygiene measures.

Pandemic pushed healthcare to the fore

US hand sanitiser sales rocketed by over 600%1, while sales of global masks surged from 12.5bn in 2019 to 387.9bn in 2020 – an eye-watering 30-fold increase2. That equates to almost 50 masks per person around the world. German glassmaker Schott, which provided the vials for around 75% of all Covid-19 vaccine projects, helped to manufacture over 1bn vaccine doses3. Meanwhile, virtual healthcare services became a necessity for millions as lockdowns and social distancing measures limited face-to-face appointments with doctors and medical professionals. In April 2020, utilisation of telehealth services for outpatient care was 78 times higher than just two months earlier in February 20204.

This – perhaps unsurprisingly – led to a record period for global healthcare equity funding, with inflows of $80.6bn across over 5.5k deals. North America, Europe and Asia all saw a rise in funding year-on-year, with a record 187 mega-rounds of venture funding in total. Broken down into subsectors, pharmaceuticals, biotechnology and medical devices all saw increases in consumer interest, and according to a report by CBInsights, digital health services also particularly benefitted, with funding increasing 45% year-on-year to an all-time high of $26.5bn5. Share prices for some of the major players in the race for a vaccine also threw up staggering numbers, with American biotech firm Novavax reporting +3,100% growth from 1 January to 1 December 20206.

In turn, global healthcare spending also reached a record high of $9trn in 2020 – equal to almost 11% of worldwide gross domestic product (GDP)7. The UK government alone spent a total of £213.4bn on healthcare in 20208. With such a laser focus on the sector, perhaps it was not surprising that momentum seemed to trail off somewhat in the following year or two as “normality” was gradually re-established.

The “new normal” brought new challenges

Following mass vaccination drives from the tail end of 2020 and into 2021, healthcare spending – and funding – began to slide. The return to pre-pandemic life across much of the globe meant fewer masks, less social-distancing and a decline in the usage of PPE in medical settings. There was an element of inevitability about this – what goes up must come down, after all. The feverish excitement around healthcare stocks during the start of the pandemic was widely expected to trail off once the “new normal” was established, and for many corners of the healthcare sector, it did.

This was seen across several subsectors. Take medical devices, for example. Following the surge in mask prices during the pandemic, they dropped significantly in 2021 and by the end of 2020 revenue had effectively halved year-on-year. Digital health funding also dropped to $25.9bn in 2022, a contraction of 57% year-on-year, with deals reaching a 5-year low. It’s worth noting that this figure is relative, however, as this was still the second-highest annual figure since 20109. Still, the MSCI World Health Care Index (USD) fell -4.97% over the course of 2022, showing the widespread depression in healthcare stocks throughout the year.

The feverish excitement around healthcare stocks during the start of the pandemic was widely expected to trail off once the “new normal” was established, and for many corners of the healthcare sector, it didNot all of this can be solely attributed to a simple post-pandemic recalibration, however. The rapidly-evolving geopolitical backdrop of war in Ukraine, soaring energy prices and inflation at levels reminiscent of the 1970s replaced headlines about Covid-19. Private equity around the world took a significant confidence hit – with healthcare no exception. The MSCI World index (USD), representing large and mid-cap companies across 23 developed markets, fell a painful -17.73% in 2022. Commenting on the slump in a report by Rockhealth, the authors stated“2022 was a downhill ride – one that we think signals the tail end of a macro funding cycle centered around the Covid-19-era investment boom”10.

Fresh opportunities for healthcare post-pandemic

Three themes the Polar Capital Global Healthcare Trust (PCGH) has real conviction in are increased utilisation, disruption in the delivery of healthcare and a pickup in M&A.

James Douglas, Fund Manager of PCGH, says: “When we talk about utilisation, we are referring to patients engaging with healthcare systems to get treatment for their medical needs. During the pandemic very few accessed medical diagnostics or treatment so we are seeing a recovery, hopefully a durable one, as more and more people engage with the healthcare system.”If right, he suggests that is a positive for medical device companies, facilities and distributors.

On healthcare delivery disruption, Douglas explains: “This is the idea can we treat patients outside traditional hospital settings. That might be an outpatient setting, an ambulatory surgery centre, at home, etc. It is cost effective, comforting and convenient.” He cites telehealth as especially powerful, where patients get instant access and can maintain anonymity should they wish to. Remote monitoring of, for example, diabetes is another good example where patients can start to control their disease with continuous glucose monitoring devices.

Meanwhile, the healthcare sector saw near-record mergers and acquisitions (M&A) in 2022, skyrocketing to an all-time high of 2,395 transactions. This amounts to an 8% increase over the previous record of 2,214 deals recorded in the year before. Although this had stalled somewhat in the early part of 2023 due to the potential banking crisis, activity has since picked up once more and has ultimately delivered a strong first half to the year – particularly for small-cap companies.

A new leaf for the healthcare sector

Behind this rosier outlook are signs that utilisation and consumption of healthcare services is returning, as several subsectors have so far reported a flush of activity in 2023.

In its April fund update, Polar Capital Global Healthcare Trust shared that medical visits, procedures and routine diagnostics have shown significant growth from the depressed levels reported during the pandemic, feeding through to a higher consumption of medicines. This in turn has benefitted both pharmaceutical firms and distributors alike11.

Though trying to predict the trajectory of the market is impossible, the healthcare sector generally offers a compelling mix of cyclicality and defensiveness, especially attractive at a time when the general macroeconomic sentiment remains paralysed by inflation and interest rate turmoil. Indeed, while big banks continue to grapple with continuous rate hikes and other industries battle with a decline in demand, utilisation of the healthcare sector remains largely robust.

Though trying to predict the trajectory of the market is impossible, the healthcare sector generally offers a compelling mix of cyclicality and defensivenessIn contrast, some areas have seen a decrease in utilisation amid the “new normal”, with US national telehealth utilisation down -3.7% in October 2022 as face-to-face appointments are gradually reintroduced12. Al though diagnostics tools and services previously buoyed by mass Covid-19 testing have since seen a fall in demand, advancements in the ability to detect a variety of cancers – including colon, breast and prostate – and outside oncology, kidney failure, indicate promise for the future13.

Commenting on the uptick in healthcare utilisation, Douglas said this is mainly down to: “Consumers and patients re-engaging with the healthcare system, but also the staffing challenges that we experienced through Covid seem to be easing and they're becoming a lot more dynamic in how they're using their staff to treat the patients. We do think it's picking up and we do think this will be a durable trend.”

What’s the verdict?

In a 2022 report about the future of healthcare, McKinsey & Company stated:“Traditional medical care is being revolutionised before our eyes. COVID-19 has driven an unprecedented pace ofdigitisation, and remote care and monitoring have proven themselves as critical pillars of health systems the world over”14.

So there is a sense of momentum and optimism that healthcare will – and has already started to – successfully evolve to suit the post-pandemic world. Its utility is not confined to a single pandemic, and in fact is a cornerstone of a global economy tackling an ageing population and thus an increased dependency on medical services. This very notion is already driving the investment strategy at the Polar Capital Global Healthcare Trust. “We are very much focused on the long-term, durable growth-drivers of our industry”, Douglas explains.

“As well as utilisation picking up and healthcare being disruptive, valuations are supportive and then finally, the political backdrop is much better now than it was, maybe, 12 months ago. So you add all those ingredients together and we believe that healthcare is an attractive place to invest.”

1 The Wall Street Journal, “Hand Sanitizer Sales Jumped 600% in 2020. Purell Maker Bets Against a Post-Pandemic Collapse”, 22 January 2021

2 Statista, “Global Mask Sales Surged 30-Fold During the Pandemic”, 12 January 2023

3 Schott, “SCHOTT Reaches COVID-19 Milestone: Vials for 1 Billion Vaccine Doses Delivered”, 10 March 2021

4 McKinsey & Company, “Telehealth: A quarter-trillion-dollar post-COVID-19 real”, 9 July 2021

5 CBInsights, “State Of Healthcare Report: Investment & Sector Trends To Watch”, 20 January 2021

6 The Motley Fool, “These Were the 10 Best Healthcare Stocks of 2020”, 15 December 2020

7 World Health Organisation, “Global spending on health: Rising to the pandemic’s challenges”, 8 December 2022

8 Office for National Statistics, “Healthcare expenditure, UK Health Accounts: 2020”, 9 May 2022

9 CBInsights, “State of Digital Health 2022 Report”, 24 January 2023

10 Rockhealth, ”2022 year-end digital health funding: Lessons at the end of a funding cycle”, 9 January 2023

11 Polar Capital, ”Optimism builds as consumption increases - April Trust Update”, 4 May 2023

12 Healthcare Finance News, ”Telehealth utilization has declined almost 4%”, 13 January 2023

13 Fierce Biotech, ”Quest predicts 80% drop in 2023 COVID-19 test revenues”, 6 February 2023

14 McKinsey & Company, ”The future of healthcare”, 4 April 2022