The healthcare sector covers a wide range of businesses involved in maintaining and improving human health, spanning prevention, diagnosis, treatment, and ongoing care. It includes pharmaceutical and biotechnology companies developing medicines, alongside medical device and diagnostics firms producing the tools for detecting, monitoring, and treating disease.
The sector also encompasses healthcare providers like hospitals, clinics, and care facilities, as well as insurers and managed care organisations that fund and coordinate patient care. In addition, it includes distributors, pharmacies, and specialist service providers like contract research organisations supporting the development of new therapies.
Healthcare plays a central role in society, shaping quality of life, economic productivity, and population outcomes, making it a key priority for individuals, policymakers, and governments alike.
This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments and any income from them will rise and fall in value, so you could get back less than you invest. Ratios also shouldn’t be looked at on their own. Past performance is not a guide to the future.
Key drivers in the healthcare sector
Demographics
Demographics are a fundamental part of the investment case for healthcare. Ageing populations are placing an ever-higher burden on healthcare systems, with the elderly more prone to chronic diseases and more likely to require long-term care.
As life expectancy improves in emerging markets, that’s a trend that’s set to gather momentum. With income growth here also outpacing that of the developed world, these regions are attracting the attention of management teams.
The research and development landscape is also rapidly shifting, with China in particular raising the bar on innovation, and offering a lighter regulatory touch to bringing new treatments to market.
Healthcare policy and funding
Healthcare is a highly emotive subject and one where governments are keen to be seen as champions of the people rather than big business. Government policy can influence pricing, the competitive environment and the cost and speed of clinical development.
In some countries like the UK, governments are the main source of healthcare funding, meaning that new treatments need to make good economic and clinical sense. In economies like the US, where there’s a much bigger reliance on private funding, insurance providers can often hold the key to a product’s commercial success.
Technology
From penicillin through to heart transplants, artificial knees, gene therapy, robotic surgery and the development of vaccines, healthcare is responsible for some of the most eye-opening innovations developed by mankind. Intuition suggests that currently unmet medical needs will require more complex treatments, potentially leading to higher costs and longer development timelines.
Scientific breakthroughs can be lucrative. But research is expensive, failure rates are high, and there’s no guarantee of a financial return. Artificial Intelligence (AI) is gaining significant attention in this space, and there are lots of potential benefits for patients, payers and businesses if adopted wisely.
Sector Performance
Taking a high-level view, the healthcare sector has generated positive returns over the last five years. However, it’s not kept pace with the broader market, where the AI roll-out has driven exceptional performance by large-cap technology companies, with the gap notably widening after the ‘Liberation Day’ sell-off.
Fears of stauncher US protectionism had a significant impact on sentiment towards the sector, and while there has been a recovery, it’s not matched the bull run we’ve seen in technology.
That’s also been played out in valuations. Typically, the healthcare sector trades on a relatively high multiple of earnings than the broader market. In recent years, the AI boom has seen higher-rated technology stocks become a more important part of global indices, helping the broader market to narrow the gap.
Healthcare valuations, on the other hand, have come off their peak and now sit just below their five-year average, helped by an acceleration in earnings growth.
It’s not been a one-size-fits-all story though.
Broadly speaking, pharmaceutical companies have been the strongest performers. That’s not unusual given their wide economic moat, built up not only through patent protection but also by scientific complexity and high regulatory barriers. In recent years, it’s a sub-sector that’s also benefitted from the boom in sales of anti-obesity drugs.
Biotechnology companies have been less profitable for investors. They tend to be at an earlier stage in bringing new drugs to market. That means more of their value hinges on future cash flows, which can weigh on valuations when interest rates are high or rising.
Medical device companies have also generated disappointing returns in recent years, reflecting sluggish revenue growth and pressure on profitability.
Key opportunities in the sector
GLP-1 and metabolic health
GLP-1 treatments like Wegovy and Mounjaro have already reshaped the conversation around obesity and diabetes.
We still see a huge opportunity ahead. But the market is now at a turning point. The next leg of growth will depend on which new-generation therapies can stand apart and deliver better efficacy, fewer side effects, more convenient dosing or stronger long-term adherence.
There could also be meaningful upside for companies that expand into new disease areas. The opportunity may stretch beyond the drugs themselves, into companion therapies, delivery devices, diagnostics, monitoring tools and patient support services.
AI and smarter healthcare
AI could become a more important growth driver across healthcare. In pharma, it can improve target selection, trial design and development efficiency. Contract research organisations can use it to streamline workflows and make studies more productive.
Medical device companies are also leaning into the trend. They’re embedding smarter software into imaging, robotic surgery and patient monitoring. That could improve patient outcomes and support stronger pricing. The likely winners will be those using AI to solve real clinical or operational problems, rather than simply chasing the hype.
Precision medicine and targeted therapies
Precision medicine and targeted therapies remain an important opportunity. Advances in genetics and our understanding of disease are making it easier to develop treatments targeting specific disease pathways and match them to the patients most likely to benefit.
Cancer is one of the clearest examples, where more targeted approaches, including immunotherapy, are improving outcomes and expanding treatment options.
Rare diseases are another area of focus, partly because many have a clear genetic basis, while the unmet need is often high, and competition in the space is often lower. For investors, the key is identifying companies with the funding to support long development cycles and the research & development discipline to turn promising science into commercial success.
Key risks in the sector
Clinical setbacks and development risk
Clinical risk is one of the biggest hazards in healthcare investing because drug development is expensive, time-consuming and highly uncertain. Most treatments that enter clinical trials never make it to market, and even late-stage programmes can still fail after years of investment. Inadequate efficacy is often the main reason, but unexpected safety concerns can also emerge as trials expand into larger and more diverse patient groups.
Beyond the science itself, setbacks can also come from poor trial design, difficulty recruiting suitable patients, or problems hitting the right clinical endpoints. For companies with a narrow pipeline or heavy reliance on a small number of products, a failed trial can cause a lot of damage.
Pricing, funding and reimbursement pressure
Policy risk is another important consideration for healthcare investors because governments and public bodies can have a big influence on pricing, funding and demand. Changes to reimbursement rules or efforts to push drug prices lower can weigh on revenues, while tariffs or other trade measures can increase costs and disrupt supply chains.
Shifts in public health policy, including changes to vaccine recommendations or funding priorities, can also alter demand unexpectedly. For global healthcare companies, that means political decisions can have a meaningful impact on growth, margins and sentiment.
Legal and patent risk
Healthcare companies can also face meaningful legal risks. Product liability claims can emerge years after a medicine has been launched, especially if questions arise over safety, side effects, or marketing practices, and the financial impact can be significant even for large companies.
At the same time, patent expiries are a constant threat in pharmaceuticals, because once exclusivity ends, lower-cost generic competition can erode sales and profits quickly.
It’s important to understand both how well a company’s pipeline can replace revenues lost to the patent cliff and how effectively it can use mergers and acquisitions to plug any gaps. Regulatory exemptions for generic manufacturers can also affect how fully drug developers capture the economics of fast-growing products.
Our view on the healthcare sector
We think healthcare is an attractive sector for long-term investors. It has a strong track record of delivering growth over time, supported by enduring drivers like ageing populations, rising demand for care and ongoing innovation.
Importantly, it’s also a broad and diverse sector, spanning everything from defensive large-cap pharmaceuticals to higher-growth areas like biotechnology and medical technology, which means there’s scope to match different parts of the market to different risk tolerances.
That said, selectivity still matters because clinical setbacks, policy changes and valuation risk can all have a big impact on returns.
Environmental, social and governance (ESG) risk
The healthcare industry is medium/high risk in terms of ESG, depending on subindustry.
Across the board, product governance is the most acute risk, with business ethics, labour relations and data privacy also contributing. Providing reasonable access to healthcare as a basic service is also a growing issue, with greater concerns surrounding the social implications of for-profit healthcare companies.
The pharmaceuticals sector is at the higher end of the ESG risk spectrum. Product governance, particularly with safety and marketing is a key risk to monitor, with safety concerns sometimes only emerging years after a product has been launched, which can result in substantial financial penalties and reputational damage.
Clinical trials, which can expose humans to new chemical entities for the first time need to adhere to strict safety and transparency protocols. Despite advances in technology, animal testing remains a key part of pre-clinical testing, with the more responsible developers making efforts to replace, reduce and refine their reliance on animals in early-stage research.
Healthcare companies we provide research on:
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss. Yields are variable and not guaranteed.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.