For institutional investors in the Netherlands

Healthcare tech: interesting opportunities but beware the hype

A growing and ageing population puts immense stress on the healthcare system. By 2050, the United Nations estimates that one in six people globally will be over 65 years of age, compared to one in 11 in 2019.

Alison Porter

Alison Porter

Portfolio Manager

Richard Clode, CFA

Richard Clode, CFA

Portfolio Manager

Graeme Clark

Graeme Clark

Portfolio Manager

16 Jun 2022
6 minute read

Key takeaways:

  • Technology is solving the healthcare supply issue, while increasing access and reducing the cost of quality healthcare.
  • Significant levels of investment in the space have increased competition for listed stocks, while new healthcare offerings from more traditional technology companies have also raised competitive intensity.
  • A cautious approach is warranted. Even following significant share price declines with some businesses appearing profitable and more sustainable, stocks could still be overvalued.

Not only are healthcare recipients ageing, so too are healthcare providers. More than 50% of active doctors in the US and a third of nurses are over the age of 50. The World Health Organization (WHO) estimates that there was a deficit of 7.2 million health workers in 2021, and that this figure will rise to 12.9 million by 2035.

Eroom’s Law (Moore’s Law spelt backwards) states there is an exponential decrease in the productivity of drugs approved per billion dollars of research and development (R&D) spending since 1950. Higher costs are ultimately passed through to governments and the consumer in the form of higher drug prices. The US Centers for Medicare and Medicaid Services (CMS) predicts around a fifth of US gross domestic product (GDP) will be spent on healthcare by 2028, and that healthcare expenditures are expected to reach almost US$7 trillion by 2030 (Fig.1).

Exhibit 1: S&P 500 annual earnings change vs. price change (%)

Fig. 1: US healthcare costs are rising

Technology is alleviating the challenges facing healthcare systems

Global healthcare costs are rising, driven by a combination of ageing populations (see Fig. 2)  as mentioned earlier, and an increase in chronic conditions with comorbidities such as diabetes and obesity. Furthermore, labour shortages present another issue given insufficient growth of healthcare workers to meet increased demand. The unprecedented pressures placed on healthcare systems worldwide due to COVID-19 exposed these frailties. But the pandemic also highlighted the value of many healthcare technology solutions and spurred more innovations and use cases of existing technology. For example, R&D platforms assisted in the rapid development of vaccines, telemedicine enabled doctors to conduct virtual consultations, while minimally invasive robotic-assisted surgeries reduced hospitalisation times. Moving forward as healthcare systems shift their focus to delivering care based on value rather than volume, digital data and analytics will be crucial to deliver lower costs, increase productivity, and improve patient outcomes.

Fig. 2: Health spending per patient rises with age

We believe technology is the science of solving problems. It is being brought to bear to address not just the healthcare supply issue, but also the rising cost of healthcare, and improve access to quality healthcare. This aligns with United Nations Sustainable Development Goal (UNSDG) 3 to ensure healthy lives and promote wellbeing for all at all ages.

No single definition of a healthcare tech company

Healthcare technologies typically aim to reduce medical costs, increase healthcare provider productivity, and improve healthcare outcomes. The space is therefore attractive to investors as it offers the potential for generating returns while having a positive social impact, with companies striving to be on the right side of government policy and regulation.

There is a diverse range of businesses within the areas of telemedicine, electronic healthcare records, diabetes and robotic surgery and the list is expanding. In comparison to other industries, there are some unique challenges when it comes to selling new technologies into the healthcare sector. Among these are the need for regulatory approvals, compliance with specific healthcare data legislation and a reimbursement pathway for the entities that pay for services administered (eg. employers, governments, and health insurers). Even when these criteria are met, healthcare providers, hospitals and patients may be reluctant to adopt new technology.

Unprecedented investor interest due to the pandemic and rise of thematic investing

In the US, after steady annual growth in digital healthcare venture capital deals and investments since 2010, growth flatlined in 2018 and 2019 at around US$8bn for each year. The pandemic prompted a sea-change, however, with investment leaping to US$15bn in 2020 and rising to circa US$29bn in 2021.1 This enthusiasm also spilled over into the public markets. After a barren 2017 and 2018, there were five new healthcare listings in 2019. Strong investor demand during 2020 and 2021 saw 14 new listings and 17 Special Purpose Acquisition Companies (SPACs) formed. Numerous digital health thematic funds and exchange-traded funds (ETFs) emerged as buyers of these new stocks, many of which were often unprofitable. Investor enthusiasm has been evident in strong merger and acquisition activity. Telemedicine platform provider Teladoc acquired diabetes management company Livongo for around US$18.5bn in 2020, while more recently Oracle announced its intention to buy electronic healthcare records provider Cerner for circa US$28bn.

A highly competitive space

As the pandemic refocused investors’ attention to the sector, this drove significant levels of private and public investment, as explained above.

The sharp rise in investment and market activity indicated that investor expectations within the healthcare space and for certain companies were potentially inflated and the ‘hype cycle’ was peaking. Digging deeper, it appeared that barriers to entry had lowered in some areas; for example, US regulators relaxed reimbursement rules for virtual consultations, reducing the need for doctors to use dedicated telemedicine platforms. Significant levels of investment had increased competition for listed companies in the space, while new healthcare offerings from more traditional technology companies were also raising the levels of competitive intensity.

As an example, in the US, Amazon introduced discounted prescriptions (Prime Rx) and expanded its virtual care offering (Amazon Care), which looked potentially disruptive to the pharmaceutical industry. Companies that were not profitable even with the organic, free wave of new customers during the pandemic lockdowns would find it only tougher to achieve profits in a more competitive, post economic reopening future. The many management teams that focused primarily on growth and setting long-term break-even targets would likely see their company’s share prices struggle in a more valuation-sensitive market environment.

Caution is warranted

The rotation away from growth stocks that began last year has led to sharp price movements within the wider technology sector, including the most popular names. In response, some high-profile tech companies have shifted their focus, aiming to ensure future growth will be balanced by profitability and cash flow generation. This may prove harder for healthcare technology companies, particularly in sub-sectors that are highly competitive and where the threat of large tech platforms disrupting the space looms large. Moreover, the difficulties in forecasting revenue and growth following the pandemic create further uncertainty.

As a result, investors may want to tread carefully. Even following some sharp falls, healthcare companies with business models that appear profitable and more sustainable, could still have valuations that are elevated relative to future growth, particularly when compared to the broader tech universe. Only those investors with strong valuation discipline have managed to avoid the significant market correction in the healthcare tech sector witnessed since late 2021.

Technology is a diverse sector with significant long-term growth potential, Adopting a selective, long-term approach with a sharp focus on valuations may help avoid the dangers of the ‘hype cycle’ and enable the identification of ‘healthier’ investments.

UNSDG, the 17 Sustainable Development Goals (SDGs), also known as the Global Goals, were adopted by the United Nations in 2015 as a universal call to action to end poverty, protect the planet, and ensure that by 2030 all people enjoy peace and prosperity.

Eroom’s Law is Moore’s Law spelled backwards. It is a term that was coined in a Nature Reviews Drug Discovery article by researchers at Sanford Bernstein and describes the exponential decrease in biopharma research and development efficiency between the 1950s and 2010. While Moore’s Law describes technologies becoming exponentially faster and cheaper over time, Eroom’s Law describes the trend of drug development becoming exponentially more expensive over time.

Exchange traded funds (ETFs) are securities that track an index (such as an index of equities, bonds or commodities). ETFs trade like an equity on a stock exchange and experience price changes as the underlying assets move up and down in price. ETFs typically have higher daily liquidity and lower fees than actively managed funds.

Barriers to entry are factors hindering the ease of entering of an industry or business area, such as high start-up costs, patents, and brand loyalty.

SPAC, or Special Purpose Acquisitions Company refers to a shell company set up by investors with the sole aim of raising money through an initial stock listing or acquisition or merger with an existing company.

Hype cycle represents the different stages in the development of a technology from conception to widespread adoption, which includes investor sentiment to that technology and related stocks during that cycle.

Technology industries can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants and general economic conditions. A concentrated investment in a single industry could be more volatile than the performance of less concentrated investments and the market as a whole.

Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.


Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.


The information in this article does not qualify as an investment recommendation.


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