BlackRock is betting that artificial intelligence, new weight loss drugs, and an aging American population will fundamentally change the investment landscape for healthcare as an industry. VettaFi contributor Dan Mika spoke with Jay Jacobs, BlackRock’s U.S. head of thematics and active equity ETFs, about how the world’s largest asset manager is viewing the future of healthcare in its latest thematic outlook.
The following transcript has been edited for clarity and brevity.
The Effects of Weight Loss Drugs
Dan Mika, VettaFi: How do you view this emerging class of weight loss drugs like Ozempic relative to healthcare overall? We’ve seen analysts fret that they could affect things like food manufacturers or gym stocks. With regard to the healthcare theme moving forward, where do you see these making an impact?
Jay Jacobs, BlackRock: Certainly this year and beyond, we think it’s going to be one of the most compelling parts of the healthcare industry. But if we take a step back, we published our 2024 Outlook [earlier this month], and we really focused on populations in the United States [and]around the world. The reason we focus on that is demographics tend to be like glaciers in [that]they happen slowly, but they can be really powerful. And they do evolve.
That’s really what we’re seeing in the age and shape of the United States and other developed countries. In 2024, there’ll be more people over the age of 65 than under the age of 15 for the first time. If you go back 100 years ago, there used to be about six times more people under the age 15 than 65. This is a massive landscape shift.
The reason I bring this up in the context of weight loss drugs is a lot of the ailments that are disproportionately affecting people over the age of 65 could be mitigated through the GLP-1 drugs. [That includes] diabetes [and]heart disease, which typically — in combination with age and obesity — really affect the senior population. As we see more GLP-1 drug development adoption and we see changes in insurance coverage, that can really be beneficial to the senior population in the United States.
AI & the Pharmaceutical Industry
VettaFi: On that point about the market for the over-65 population growing: The report notes that using AI for drug discovery could potentially save up to half of the cost of preclinical trial drug discovery. Do you think that drugmakers are going to face pressure to lower prices across the board on new drugs, since they’re able to drastically reduce the risk and costs of drug discovery? And what would that implication be for this industry if they can reduce costs in this way, while at the same time engage with a much larger volume of people?
Jacobs: In theory, you can have more competition in these areas. What AI is doing is taking in tons of data around patients, and trials, and drug compounds and sifting through that data efficiently.
Right now, drug development is incredibly expensive and takes a very long time. If a company has a blockbuster drug, that’s a challenging decision for another company to say, “I’m going to invest five to 10 years, potentially hundreds of millions of dollars just to compete in that category.”
But if AI can increase the speed, reduce the cost of research, then you could see more competition, and that would impact drug pricing. Just like we see in a lot of different industries, AI can really enhance efficiency. We think healthcare is currently a ripe space for AI to be able to sift through the vast amounts of data that exists.
The Capital Outlook for Healthcare
VettaFi: Towards the end of the section on healthcare, you talked about the capital outlook for healthcare stocks being tight in 2023. What about the capital outlook for, in particular, biotech and medical innovation stocks heading into next year when markets are beginning to price in late spring, early summer rate cuts from the Federal Reserve? How do you think those effects differ for the mega-cap established drugmakers versus the smaller caps?
Jacobs: Biotech companies, in particular, can be treated as long-duration securities. You could think of the earliest-stage biotech companies having an idea, maybe in clinical trials, but they have several years of funding needs before they can get FDA approval and start to make money and turn a profit. They’re very dependent on capital markets for funding. You can imagine in a market where interest rates are rising and equity valuations are lower, it’s more difficult to go to the market to raise capital. Then that could either slow innovation or lower valuations.
What we’ve seen this year — [excluding]GLP-1 drugs, which have done very well this year — biotech as a whole has been hit by rising interest rates, and frankly, a rising not just at the short end of the curve, but a rise in the 10-year Treasury.
The Impact of Potential Rate Cuts
If we do see cuts this coming year or in the second half of the year, or if we continue to see the trajectory of the 10-year yields coming in, that would certainly be a positive macro development for biotech stocks. But when we think about things through a thematic lens, we take a medium- to longer-term view, where often those macro conditions tend to take less weight than structural drivers like growing adoption, like breakthrough drugs, like demographic shifts that are driving things forward.
Look 10 years out, and you’ll see diabetes prevalence to grow 46% by 2030, and you look at how effective GLP-1 drugs are at treating diabetes. It’s difficult to predict where the 10-year Treasury yield will be by 2030. But we have a very strong conviction that GLP-1 drugs could be very successful over that time frame.
Effects of Longer Life Spans on the Healthcare Sector
VettaFi: If your conviction is correct, what are the implications here for just the broader market? What are the implications of a larger older population that’s living longer and has access to drugs that more specifically treat things like diabetes, like obesity, like Alzheimer’s? How do you even begin to consider the knock-on effects throughout the broader market as a long-term investor?
Jacobs: You really have to think about one of the second and third-order effects of people living longer. We already have an aging population, which is a combination of a multidecade trajectory of people having longer life expectancies coupled with declining birth rates. That is leading this pressure on a higher average age in the United States and a greater pool of senior citizens. You add to that new drug categories like GLP-1, which can tackle some of the most prevalent diseases among senior citizens, allowing them to live longer.
There are implications in healthcare and what’s going happen next. There are implications on society as to what happens next. If you can tackle things like heart disease and diabetes, and people are living to 85 and 90, what are the implications of that? Alzheimer’s prevalence for people over the age of 65 is about one in nine. If you go over the age of 85, that’s about a third of the population.
Not only do you have more Alzheimer’s and dementia instances within an aging population over the age of 65, but if you have more people living over 85, then you really have a lot more demand for drugs like that. That’s kind of a within-healthcare sector impact.
Changing Workforce
If you look beyond healthcare, we already see this in some government statistics and estimates. Over the last 10 years, there were nearly 20 million people added to the workforce in the United States, but over the next 10, it will be closer to 5 million.
Given government priorities to support high-growth industries like semiconductors and EVs, the slowing growth of the workforce will require more productivity and strong trade partners. We see this coming into play with strong demand for AI and automation to increase productivity, as well as growing trade relationships with key partners like Mexico and India.
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