How to contribute to the rapid expansion of healthcare

The healthcare industry is experiencing significant innovation and growth

Sven Borho, the fund manager, and James Mackreides discuss the opportunities for investors.

Healthcare is a broad term, according to James Mackreides. Could you begin by describing the contents of your fund's benchmark, the MSCI World Healthcare index?

Sven Borho manages the Worldwide Healthcare Trust's portfolio in addition to being a co-founder and managing partner of OrbiMed.

Sven Borho: Every aspect of the industry is covered. There are large pharmaceutical companies, more inventive smaller-cap pharmaceutical and biotechnology companies, manufacturers of generic medications, manufacturers of medical devices, and service providers. These are the major US health-management organizations (HMOs), which are private hospitals and health insurers. The index does not include healthcare in emerging markets, but it is diversified across the US, Europe, and Japan.

James Mackreides: Investors have historically been able to rely on both structural growth and income in this industry, and it's commonly said that "health is wealth." However, it has been a challenging decade for the index. What is the issue?

Sven Borho: One issue is that pharmaceutical prices have become a political football, leading to years of unpredictability. In the presidential contest between Hillary Clinton and Donald Trump, drug prices played a significant role. Under Joe Biden, we had some sort of drug price controls, and when Donald Trump took office again, the system was tightened.

The increase in interest rates over the previous few years was the other major obstacle. Dearer money lowers the present value of future profits, which hurts growth stocks like smaller biotechs. Between mid-2015 and mid-2025, there was no change in the SandP Biotechnology Select Industry index. During that time, the S&P Health Care Select Sector index increased by 60%, while the S&P 500 and Nasdaq saw increases of 300% and 400%, respectively.

James Mackreides: Has the threat posed by drug prices diminished?

Sven Borho: The uncertainty discount has begun to decline because the industry is aware of its current position. The fact that US drug prices were higher than those in other countries annoyed Trump. He has now reached an agreement with the industry whereby the government will pay reduced costs for both current and future medications supplied to Medicaid and Medicare programs. Most-favored nation (MFN) pricing, which matches prices offered to a basket of other developed nations, is being used in this transaction.

In the meantime, mergers and acquisitions (M&A) are increasing as large corporations attempt to make up for the loss of patents on important medications. At that point, a drug's prices drop by 98% due to the impact of generic competition. For example, the £30 billion yearly sales of Merck's cancer medication Keytruda will expire in 2028. Between 2025 and 2028, a significant product will be released from patent by each of the Big Pharma companies. The industry is dealing with a double whammy because this and the Trump administration's pricing agreement coincide.

History demonstrates that internal research and development (R&D) cannot close a pipeline gap such as this one. Therefore, the big names will go shopping, either purchasing smaller companies with promising products outright or obtaining the right to develop a drug from them.

Big Pharma is looking for products with potential yearly sales of at least £3 billion. You are on someone's shopping list if you are a biotech company or specialty pharmaceutical company with a medication that has that kind of potential. Because of this, biotech companies make up 30% of our portfolio, with a particular emphasis on those that are most likely to be acquired. A "basket" of the stocks most likely to be bought out makes up 12% of the portfolio overall.

James Mackreides: Going back to the topic of drug development for a moment, what percentage of medications make it from discovery to approval?

Sven Borho: One in ten patients advance from pre-clinical trials to regulatory approval; this percentage hasn't changed significantly over time. The largest bottleneck in the industry is this. The process, which takes ten or even fifteen years, cannot be accelerated. For example, patients must take a medication for a specific duration.

Costs have also increased significantly. In the past, the cost of bringing a medication to market was about £1 billion. It is now more than £2 billion. It can cost up to £300,000 to enroll one individual in a clinical trial. Expenses have increased due to compliance and regulatory requirements as well as the overall trend of inflation.

James Mackreides: What impact might AI have on the field?

Sven Borho: It will probably help us find more compounds to test, but that will only increase the number of possible treatments that are accumulating prior to the clinical testing process. AI will be revolutionary in the fields of illness diagnosis and treatment. It should be far more adept at diagnosing and treating illness than a general practitioner (GP) because it can combine data, such as your blood tests and MRI scans, and compare new information to it. It might not be too long before people stop seeing general practitioners altogether.

Both this and robotic surgery should drastically cut expenses. In my opinion, manual surgery will become obsolete in the near future. Even now, a doctor in London could use a medical robot to treat a patient in New York. Therefore, Intuitive Surgical, a manufacturer of robotic surgeons, is one of our favorite businesses.

AI should help us control healthcare spending; 12% of all healthcare spending, or a fifth of GDP in the US, is spent on medications; this percentage has remained constant over time. The remainder is accounted for by surgeries, hospitals, general practitioners, and so forth. This 88% should now be deflationary, offsetting the cost of the population's aging.

James Mackreides: What effects will medications for weight loss have?

Sven Borho: The impact on chronic diseases associated with excess weight, particularly the major ones like diabetes, cancer, and cardiovascular disease, is the big story. Of course, early adoption was prompted by the cosmetic aspect. According to data, these treatments reduce your risk of Type-2 diabetes by 80%.

There are repercussions in other areas, such as sleep apnea or hip and knee surgeries, the likelihood of which decreases if you are 20% lighter. Oral treatments, as opposed to injectables, will become more popular in the next phase of the boom, with Eli Lilly leading the subsector. Although other well-known brands have a successful weight-loss division, I find Structure Therapeutics to be the most intriguing approach to using weight-loss medications.

It focuses on oral therapies for diseases associated with obesity. Its oral obesity treatment, which is second only to Eli Lilly's, is set to enter phase III, the last stage of clinical trials. One year after the pharmaceutical giant's treatment (which is scheduled to arrive this month), it should be available for purchase. Most likely, the group will be purchased. For many years to come, the biggest class of drugs will be those used to treat weight loss.

James Mackreides: Describe your fund's top three holdings.

Sven Borho: We started it in 1995, and I've worked in the industry for 35 years. From the fund's establishment until the late spring of 2025, the trusts' net asset value (NAV) experienced a compound annual return of 13.5 percent, surpassing the benchmark index's 11.3 percent. The key to our success is a persistent emphasis on innovation in the fastest-growing businesses. We are widely geographically diversified because we have never cared where those businesses are located. Once more, the emphasis on innovation is demonstrated by our biotechnology overweight position in comparison to the benchmark.

AstraZeneca, Boston Scientific, and Eli Lilly are the top three companies outside of our M&A basket. The final company, a long-term compounder with 15% annual growth in earnings per share, is among the fastest-growing and best-managed medical device companies. A wager on the theme of weight loss is Eli Lilly. Driven primarily by oncology, AstraZeneca is the pharmaceutical group with the second-fastest rate of growth in the world. Even in the large-cap market, we like to find the fast growers. The fastest-growing medical technology companies are Boston Scientific and Intuitive Surgical.

Our stake in Jiangsu Hengrui Pharmaceuticals in China is also worth mentioning. It offers access to the remarkable innovation in the Chinese pharmaceutical industry and makes up five percent of the portfolio. With about 150 projects, Jiangsu's R&D pipeline is the second largest in the world, behind Pfizer's 156. In almost every area, they have a competitive compound.

Additionally, it takes them a third as long and costs them ninety percent less to move from the pre-clinical stage of the pipeline to phase one or two data, which is the stage at which you receive the first efficacy data in human clinical trials. The scientists working here are just as qualified as those in the West; many have completed their PhDs or held biotech jobs here. Both the regulatory burden and R&D costs are significantly lower in China, particularly for early-stage trials.

However, things become more difficult when clinical trials reach phase three. In Western markets, a Chinese company is unable to conduct such trials. It must grant licenses for the medication to its Western counterparts. The Food and Drug Administration, a US regulator, is skeptical of Chinese data, and the procedure is also politically sensitive. Because of this, the heads of R&D at Western companies travel to China three times a year to discuss these potentially enormous deals.

That theme is transformative. Jiangsu Hengrui is at the epicenter. It is Nvidia's Chinese biopharmaceutical counterpart. It is the largest inventor. As I previously stated, Jiangsu has the second-highest number of R&D projects in clinical trials after Pfizer, but it has the largest pipeline in the world when pre-clinical projects are taken into account. It has another 500 projects, I believe. Its compounds are also of the highest caliber.