Investing in Healthcare and Biotech: The Investment Case and the Risks

The global healthcare sector has delivered strong long-term investment returns with relatively low sensitivity to economic cycles — people need medical care regardless of whether GDP is growing or contracting. Demographic tailwinds from ageing populations worldwide provide a structural demand driver that is decades long. Yet the sector is also home to some of the most binary investment risks available in public markets — particularly in biotechnology, where a single clinical trial result can determine whether a company succeeds or fails. Understanding the subsectors, the risks, and the appropriate level of exposure is essential for the internationally mobile HNW investor.

The Structural Tailwind: Demographics and Healthcare Demand

The fundamental investment case for healthcare is demographic. By 2050, the global population aged 65 and over will approximately double from today's level, reaching over 1.5 billion people. Older populations consume healthcare at a significantly higher rate than younger ones: the average 75-year-old uses healthcare resources at roughly four times the rate of the average 35-year-old.

Healthcare spending as a share of GDP has risen in virtually every developed economy over recent decades, and this trajectory is unlikely to reverse in an ageing society. In the United States, healthcare is approximately 17% of GDP. In the UK, NHS spending as a share of GDP has risen consistently. In emerging markets, rising incomes drive demand for higher-quality healthcare services, pharmaceuticals, and medical technology.

In addition to demographics, genuine medical innovation continues to expand what can be treated — creating new demand rather than merely redistributing it.

The Four Main Subsectors

Large-cap pharmaceuticals are the defensive anchor of healthcare investing. Companies such as AstraZeneca, Novo Nordisk, Roche, Novartis, Pfizer, and Eli Lilly are among the world's largest companies by market capitalisation. They generate very high operating margins (often 25-35%), strong cash flows, and typically pay dividends. The main risks are the patent cliff (see below) and drug pricing pressure in major markets. AstraZeneca has been one of the most successful large-cap pharma growth stories of the 2020s, driven by its oncology pipeline. Novo Nordisk's GLP-1 diabetes and obesity drugs (Ozempic, Wegovy) made it briefly Europe's largest company by market cap in 2023-2024.

Biotechnology companies are developing novel therapies, often targeting specific genetic or molecular mechanisms. They range from pre-revenue research companies burning cash in clinical trials to commercial-stage companies with approved products. The risk profile is fundamentally different from large-cap pharma: a Phase 3 clinical trial failure can eliminate most of a company's value overnight. Biotech is not suitable as a concentrated position for most investors. The reward for successful development is very large; the risk of failure is also very large. The sector is best accessed through diversified ETFs or funds unless the investor has specific domain expertise and research capability.

Medical devices and diagnostics occupy the middle ground between pharma and services. Companies such as Medtronic, Boston Scientific, Stryker, Edwards Lifesciences, and Becton Dickinson manufacture products that are used repeatedly — surgical instruments, stents, hip replacements, glucose monitors, CT scanners. Their risk profile is more predictable than biotech: products have regulatory approval and established clinical use. Moats are created by FDA/CE approval processes, entrenched clinical relationships, and customer stickiness. The innovation cycle in medical devices is incremental rather than the binary step-changes of drug approvals.

Healthcare services — hospitals, managed care organisations, laboratory services, pharmacy benefit managers — are the largest segment of healthcare spending in aggregate. In the US, managed care companies such as UnitedHealth Group, CVS Health, and Humana are very large businesses. They are more economically sensitive than pharmaceuticals and more exposed to policy risk (changes to Medicare Advantage reimbursement, for example, affect managed care companies directly). Internationally, listed hospital groups (such as Mediclinic, IHH Healthcare in Southeast Asia) provide exposure to the growing private healthcare demand in emerging markets.

AI and Precision Medicine: The Innovation Tailwind

The integration of artificial intelligence into drug discovery is one of the most significant developments in the pharmaceutical industry in decades. AI applied to protein structure prediction (Google DeepMind's AlphaFold2 was a landmark achievement), molecular simulation, and large-scale screening of compound libraries is compressing the early stages of drug discovery from years to months in some cases.

Precision medicine — targeting therapies to specific genetic subgroups of patients — is producing drugs with higher success rates in clinical trials because they are tested in the patients most likely to respond. Companies such as Blueprint Medicines and Kymera Therapeutics are developing highly targeted therapies based on specific molecular mechanisms. The oncology sector has been particularly transformed: drugs targeting specific genetic mutations (EGFR mutations in lung cancer, BRCA mutations in breast cancer) are far more effective in the relevant patient subgroup than traditional chemotherapy.

The caution: AI dramatically accelerates candidate identification and early screening but does not solve the fundamental challenge of clinical trials — human biology in vivo is more complex than any model. Clinical trial success rates have not dramatically improved despite better early-stage technology. AI is a powerful tool, not a guaranteed shortcut to approved drugs.

The Patent Cliff: The Biggest Near-Term Risk for Large-Cap Pharma

The major pharmaceutical companies face a significant challenge over 2025-2030: patent expiration on blockbuster drugs that currently generate billions in annual revenue. When a drug patent expires, generic manufacturers (for small-molecule drugs) or biosimilar manufacturers (for biological drugs) can produce the same drug at a fraction of the price, typically causing revenue to fall 70-90%.

Known upcoming patent expirations include Eliquis (apixaban — Bristol-Myers Squibb/Pfizer), Stelara (ustekinumab — J&J), Keytruda (pembrolizumab — Merck), and several other major biologics. The combined revenue at risk across the major pharma companies is very large.

Companies are responding in two ways: internal pipeline development (spending very large amounts on R&D to develop replacement drugs) and acquisitions (buying smaller biotech companies with approved or late-stage products). The history of pharma M&A is mixed — many large acquisitions have destroyed shareholder value — but the strategic logic of buying pipeline is clear. The patent cliff is a known risk; it is already priced into company valuations to some degree.

Drug Pricing Politics: The US Market Risk

The United States is the world's largest pharmaceutical market and the one where drug prices are highest. For decades, US drug prices have subsidised the global pharmaceutical industry's R&D spending — the US essentially paid for drug innovation that other countries accessed at prices closer to manufacturing cost.

The Inflation Reduction Act (2022) introduced, for the first time, the ability for Medicare (the US government's healthcare programme for the elderly) to negotiate drug prices with manufacturers. The initial list of drugs subject to negotiation was announced in 2023, with negotiated prices taking effect from 2026 onwards. The scope of the programme is set to expand over subsequent years.

This is a genuine structural headwind to US pharmaceutical profitability, though the scale of the impact depends on which drugs are negotiated and the negotiated price reduction. The pharmaceutical industry has challenged the programme in US courts with limited success. Political pressure to reduce US drug prices is unlikely to reverse regardless of which party controls Congress.

European pharmaceutical revenues are already subject to Health Technology Assessment (HTA) processes and reference pricing across EU member states, making them somewhat less exposed to the US policy shift than the US pharmaceutical companies.

Healthcare ETFs and Funds for International Investors

iShares Global Healthcare UCITS ETF (IUHC) — provides broad global healthcare exposure including pharma, biotech, medtech, and healthcare services. This is a straightforward core allocation to the sector.

iShares S&P 500 Health Care Sector UCITS ETF — US-focused healthcare index, with large weightings to UnitedHealth, Johnson & Johnson, Eli Lilly, AbbVie, and Merck.

SPDR S&P Biotech ETF (XBI) — pure-play biotech, equal-weighted across the S&P Biotech index. High risk, high potential return. Appropriate only for investors who understand the binary nature of biotech and can tolerate high volatility.

Polar Capital Healthcare Opportunities Fund — active, long-only, managed by a specialist healthcare investment team. Good long-term track record with broader sector coverage.

Worldwide Healthcare Trust — LSE-listed investment trust, managed by OrbiMed, one of the world's largest dedicated healthcare investment managers. Diversified across pharma, biotech, and medtech globally.

For most internationally mobile HNW investors, a combination of a broad healthcare ETF (as the core allocation) with a small allocation to an active biotech-exposed fund provides reasonable sector exposure without excessive concentration in the highest-risk biotech names.

Sizing the Healthcare Allocation

Healthcare represents approximately 12-15% of the MSCI World Index, so investors in global market-cap-weighted index funds already have meaningful healthcare exposure. An active overweight to healthcare makes sense if you have conviction in the demographic tailwind, the AI innovation story, or specific subsector opportunities. A typical overweight might add 5-10 percentage points of healthcare exposure relative to the benchmark, accessed through a combination of ETFs and active funds.

Healthcare is not a risk-free defensive allocation — drug pricing policy, patent cliffs, and trial failures create significant individual company risk. Diversification across subsectors and geographies is essential.

How Global Investments Can Help

Our advisory team works with clients to build healthcare exposure that is appropriate for their portfolio size, risk tolerance, and tax position. We help clients navigate the distinction between stable large-cap pharma, the higher-risk biotech sector, and the often-overlooked medical devices and diagnostics subsector. For internationally mobile investors, we advise on the most appropriate fund wrapper and on managing the US drug pricing risk within a broader global healthcare allocation. Investments can fall as well as rise; individual biotech stocks can lose most of their value on a single trial result; seek qualified financial and professional advice before making healthcare sector investments.