VALUE: After Hours (S08 E02): Healthcare Spending as a Share of GDP: U.S. vs. the World

During their recent episode, Taylor, Carlisle, and Andrew Summers discussed Is Healthcare Spending as a Share of GDP: U.S. vs. the World. Here’s an excerpt from the episode:

Andrew: Yeah, so, healthcare did really well. I think coming out of the financial crisis, really 2010 to 2015 was a spectacular period for the sector. There was a lot of merger and acquisition activity happening at that time. There were a lot of exciting new product launches happening at that time. And so, that drove a lot of interest investing in healthcare.

Biotechnology specifically did extremely well in that period of time, mostly because of the innovation that was coming out of that part of healthcare. And then, in 2015, things really changed. The sector peaked 2015 maybe into 2016. There were more patent drugs coming off patent in that period of time, which created headwinds to growth. There was less innovation happening in that period of time.

I think you saw some reduction in M&A activity. I know from 2022 to 2024, we saw quite a big drop-off in M&A activity. So, just some of these things stacking on top of one another created a situation where the sector underperformed for a period of time. So, we would agree with you, at least on a relative basis, the sector looks very attractive compared to the broader market.

Jake: Yeah, GMO had a piece recently that was talking about this healthcare and the valuation versus the market. They showed a chart that went back to the 1980s. I think if I look at it in squint now, it’s minus 40% below on a relative basis. This is of their composite metrics that they’d use of PE, normalized price-to-sales, cash flow, dividend yield.

But the other interesting thing they had was a chart in there that was healthcare spending as a fraction of GDP. They had all of the other OECD nations, and they’re all together on this. It’s an upward trend, and they’re now somewhere in the 10% category. And the US was up at 18% plus as this outlier ramp above everyone else.

First of all, what do you make of that, I guess? And then second, is that sustainable? Is that actually argument that we’re maybe overspending, as a society, on healthcare relative to others and maybe that could be a headwind, which previously was a tailwind? How do you think about that?

Andrew: That’s been a long-running debate in the healthcare sector, whether or not we’re overspending relative to the rest of the world. I don’t really think that’s open to debate, clearly, we are based on the data, but there’s a thesis that the United States is subsidizing the rest of the world with our innovation. And that innovation is expensive. And because of that, we charge high prices for the innovation that we bring to the market here in the US.

Countries outside the United States, Western Europe and so forth, they pay much less than we do for those drugs. And so, there’s an idea that we’re of sponsoring or subsidizing the rest of the world with the R&D that’s taking place inside the United States. So, I think that’s something that the Trump administration is of taking head-on, which other administrations did not necessarily.

So, now, for the first time really in the 30 years that I’ve been doing this, you’re seeing price concessions on the part of drug companies in the United States. The Inflation Reduction Act is driving a lot of that. And so, that’s put some pressure on the sector, especially on drugs specifically that we just haven’t seen historically. But it all feeds into the fact, I think, that we are, as a nation, spending quite a bit more than other developed nations around the world.

Tobias: To your point, though, the other side of that coin, is that there are drugs available in the US that just aren’t available in the rest of the world. And until they’re approved by whatever their local regulator is, they’re just not available. They want to pay a lower price, but if the drug company doesn’t agree, they’re just never available. So, the US has a bigger menu.

But my question was more about biotech. Similar to the trend that we saw in healthcare, where it looked to be unusually cheap. I thought I saw some chatter last year, too, that biotech was looking unusually cheap, too. Is that true and why do you think that’s occurred?

Andrew: Yeah, I think that is true. If I look at my portfolio specifically, a year ago, we had about 5% of the fund in biotech. And fast forward to today, we have about 40% of the fund in biotech/pharma. But it’s been a real sea change for us beginning about a year ago.

I think to your initial point, you’re spot on, the sector or the industry was out of favor for a number of years and that led to undervaluation. But more importantly, what I’m seeing today is biotech has always been about innovation cycles.

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VALUE: After Hours (S08 E02): Healthcare Spending as a Share of GDP: U.S. vs. the World

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