Morgan Stanley
  • Wealth Management
  • Mar 21, 2022

Health Care Innovation Yields New Opportunities for Investors

Advances in technology and innovation have led to new breakthroughs in health care. Here’s a look at three areas of opportunity for long-term investors.

Barring the pandemic itself, one of the biggest surprises of the past few years may have been the breakneck speed at which the health care industry rolled out vaccines, therapeutics, diagnostics and patient care.

What’s also surprising? Despite this ground-breaking innovation, sector performance has been muted: In a market that notched 70 record closes in 20211, the health care sector lagged and was recently trading around historically low valuations relative to the S&P 500 Index.

Manage your Wealth

Find a Financial Advisor, Branch and Private Wealth Advisor near you

My team and I at Morgan Stanley’s Global Investment Office believe these valuations, together with a slew of game-changing developments, present opportunity for long-term investors. As we recently discussed at our annual AlphaCurrents Conference, health care is likely to see an acceleration in investment and innovation that we think is not yet reflected in the price of many stocks.

Here’s a look at three areas of opportunity we think investors may find especially compelling:  

1. Genomics

Advances in computing power and machine learning have contributed to gains in genomics—the study of all genes that can be found in an organism—over the past two decades, giving scientists detailed information about the nature of human genes and how human bodies are built. Look no further than the rapid development of messenger RNA (mRNA) COVID-19 vaccines to get a sense of the impact.

Increased attention on genomics may be a positive driver for the industry, potentially drawing more aggressive funding from governments and private investors.  

Note: Numbers represent search interest relative to the highest point on the chart for the given region and time. A value of 100 is the peak popularity for the term. A value of 50 means that the term is half as popular. A score of 0 means there was not enough data for this term. Source: Bloomberg, Haver Analytics, Morgan Stanley Wealth Management Global Investment Office as of April 13, 2021

2. Biotech

With proof of concept in the form of two FDA-approved COVID-19 vaccines, our strategists expect to see more focus on additional mRNA applications. One exciting area is hard-to-treat and rare “orphan" diseases, of which there are roughly 10,000 but comparably few treatments. Another is cancer. And yet another: vaccine-elusive viruses like HIV and Zika, plus more common ones like the flu.

Beyond mRNA, better use of data and analytics has already greatly improved drug discovery. In coming years, new treatments in cancer, neurology and gene-based therapies—areas of focus prior to the pandemic—may come to market.

3. Diagnostics and Beyond

Innovation in areas such as diagnostics, detection and patient care has also altered the industry. A growing number of companies are exploring tests that can detect various diseases in the early stages, including cancer, where a late-stage diagnosis is a leading cause of death. New blood tests that can detect early-stage cancer may lead to better patient outcomes, not to mention lower treatment costs.

Increasingly sophisticated and connected medical devices are driving improvements in convenience and care. For example, wire-free adhesive heart monitors can now capture cardiac data and transmit it to a patient’s doctor, and pacemakers can relay data wirelessly to a patient’s smartphone.

Health care is likely to see an acceleration in investment and innovation that we think is not yet reflected in the price of many stocks.

Investing in the Future of Health Care

Of course, there are no guarantees when it comes to drug development and medical discoveries. Behind every breakthrough is often a series of failures. Yet, innovation in the pipeline today is hard to ignore. For investors, a few overall considerations:

  • The big picture: The macro environment may be favorable to the health care sector as we transition into the next phase of the economic cycle. In fact, markets have tended to reward quality stocks during this transitional period—and overall, the health care sector has a lot of companies with strong balance sheets, high profitability, dividend income and capital return.
  • Value: The less-expensive areas of health care such as pharma, biotech and services may present opportunity if innovation post-pandemic revives growth for the sector. But it could vary from company to company based on industry trends, research and development, approvals and other factors—as opposed to broad tailwinds.
  • Growth: In search of potential bargains? Growth-style health care tech stocks have been trading at a premium relative to other sectors in health care, but at a discount compared to other growth-oriented sectors of the broader market, such as pure tech, where stocks have continued to see rich valuations.
  • Risk and reward: Rather than going all-in on value or growth strategies in health care, consider diversifying your exposure to achieve the right balance of risk and reward for your portfolio.

Learn more in our AlphaCurrents report, “Diagnosing Health Care Opportunities Post-COVID-19” or listen to the audiocast from our 2021 AlphaCurrents Conference. Connect with your Morgan Stanley Financial Advisor to request a copy of the report or to discuss opportunities in the health care sector that might make sense for you.

Questions to Ask Your Morgan Stanley Financial Advisor:

  • How can my portfolio benefit from recent advances in areas like genomics, biotech and diagnostics?
  • How can I achieve the right balance of risk and reward when investing in the health care sector?

Have a Morgan Stanley Online Account?