The stocks to buy now as the boom in digital healthcare takes off

The pandemic has proved an ideal backdrop for the digital-health sector – but this has been a compelling investment theme for years. Listed companies in the industry have long been outpacing the wider stockmarket, while the amount being invested by new start-up businesses keeps shattering records.

Researchers see ample scope for further expansion. Covid-19 is likely to mark not a one-off bubble for the industry but the start of pervasive structural change. Investors should view the health-technology transformation as a multi-year investment opportunity in its infancy.

Digital-health stocks as measured by the US dollar-denominated MSCI ACWI IMI Digital Health index have returned nearly 18% a year since early 2013, significantly outperforming global stocks’ 10.8%. Over three years, the figures are nearly 22% versus 17.3% respectively. Digital-health stocks have beaten the broader market in six of the past seven calendar years and are roughly even in 2021 so far.

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This index is a wide reference point, tracking the performance of 263 large, medium-sized and small companies in both developed and emerging markets. They are expected to generate significant sales from new products and services focused on the key areas of telehealth, medical robots and automation in healthcare.

Meanwhile, more and more venture-capital money is pouring into innovative health-technology start-ups: 2021 is on track to be another record year, with around $51bn already raised for global health-tech start-ups so far. Research from consultants McKinsey describes digital health as a $350bn industry in 2019, and growing by at least 8% a year.

Expansion in some areas, such as digital prescriptions (consulting a specialist and receiving a prescription online) or the automation of health data, is expected to reach 15%. Forecasts of this kind are exciting investors, as are some recent multibillion-dollar deals such as the $18.5bn purchase in 2020 by US virtual-doctor group Teladoc of Livongo, a specialist in chronic-disease management.

A bet on the future of technology

Despite this promising backdrop, digital health is sometimes overshadowed by hot growth sectors such as financial technology, movie streaming or fast-food delivery. But the sector’s potential is huge, and it is just as effective a play on futuristic themes such as the Internet of Things, which will connect us with medical devices through smart wearables.

Then there is the cloud (for storing and making accessible all our health records and data); artificial intelligence (for aiding and accelerating research and development, and improving how we diagnose and predict disease); and Big Data and the blockchain (for processing and making sense of all the data).

Moreover, while Covid-19 has accelerated health digitisation, the broader push for innovation, investment and planning is being driven by governments and international agencies.

In 2005, the World Health Assembly, which governs the World Health Organisation, was urging member countries to look into long-term planning for what were then more commonly called eHealth services.

This has been a recurrent theme in international forums. With populations growing and ageing, policymakers know that information technology is crucial to advances in healthcare.

Meanwhile, progress in areas such as online meeting facilities or 5G-mobile networks, which will allow faster online access for all manner of devices and tools, are another tailwind for the sector. The same applies to the trend towards environmental, social and governance (ESG) investing, a key subsector of which is social-impact investing.

The scope for generating outsized improvements for society will appeal to investors who want their money to help effect change in ways charitable donations typically cannot achieve.

The potential in telehealth

A key subsector attracting investors is telehealth. This is a digital response to the healthcare industry’s problem throughout the pandemic of how to deal with patients while minimising their physical presence in medical practices to keep them and staff safe. The internet is bridging the gap, connecting those in need with medical practitioners online in virtual health-centres.

Industry research for telehealth varies, with some forecasts for growth reaching 25% or even 35% annually for five years, making for a $200bn-$400bn industry. McKinsey estimates $250bn of US healthcare spend could go virtual – a near 100-fold leap from the $3bn annual sales for US telehealth before Covid-19.

Public and private healthcare providers, including the NHS, Cigna, UnitedHealth and Doctor on Demand have been investing in the field. Businesses involved have been able to attract new investment and are delivering growth supportive of the upbeat outlook.

Of course, dealing with patients remotely is far from new, as telephone consultations have been an enduring, albeit small, part of medical interaction for years. With Covid-19, however, the number of remote medical encounters last year in the US, for example, soared to nearly 50% of the total, compared with 10% the year before, according to McKinsey.

As the pandemic ebbs, patients will want and need to see GPs in person again, but others will prefer to stay with the quick online consultations and immediate prescriptions that many have been initially forced to try.

Recently, 40% of US consumers said they’d keep using telehealth, up from 11% who used it before Covid-19, says McKinsey; 58% of medical staff now view telehealth more favourably than before the virus arrived.

We have also seen that in addition to patients consulting a professional online, they can now also gain access to more digital information than was previously possible.

Health agencies have put more material online for patients to peruse while also targeting individual patients with information specifically for them, such as the reasons for a particular age group to take a flu vaccination at a certain time of year.

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Stephen Connolly heads a family investment office, and has worked in investment banking and asset management for nearly 30 years (sc@plainmoney.co.uk).