Medical Innovation. A valuable opportunity

The Health Care sector is one of those lagging behind the most since the beginning of the year. But the medical innovation segment has excellent growth opportunities, aided by the technological revolution.

The underperformance of medical innovation compared with tech

The medical innovation sector is strongly linked to the technology one, with a correlation of monthly returns of about 75 percent over the past 15 years. Indeed, both sectors make growth the driver of shareholder value creation, as they are characterized by frontier companies that are able to innovate in both the medical and technology fields by investing heavily in research.

In the last six months, however, the two sectors experienced the fourth worst mismatch since 2007. To measure the mismatch, we can look at the performance differential between the Medical Innovation sector and the Nasdaq over the past 6 months, which came in at -18.69%, falling within the top 1% of the worst performance differentials in history.

A look back: reasons for underperformance in the past year

There are several reasons behind the underperformance of the medical sector over the past year.

First, investors' risk aversion in 2022, which reduced valuations of high-growth sectors such as tech and health care.

Second, in 2023, the health care sector experienced an earnings cut of more than 20 percent, showing a recession.

Finally, investment inflows into the medical and biotech innovation sector continued to show a negative trend, resulting in M&A deals slowing down.

A look into the future: growth will be driven by the technological revolution

Despite the negative performance of the past year, it is necessary to emphasize that the Medical Innovation sector is going through a technological revolution driven by artificial intelligence, whose main consequence will be to go to increase profit growth.

There are several areas of application of artificial intelligence, and among them are:

1. The identification of genetic risk factors in multi-causal diseases (e.g., arthritis, multiple sclerosis, and diabetic ulcers).
2. Prediction and knowledge of all the complex biochemical systems and connections in the human body to find new ways to treat a disease.
3. Modeling ligand/receptor interactions to find the best treatment.
4. Replicating animal and organ samples to replace them in preclinical testing to reduce years of experimentation
5. Identify the best patients for experimental drug delivery to maximize potential outcomes.
6. Provide specific prognostic information to diagnose and treat patients.
7. Predict the genotype and phenotype of a human species taking into account all regulatory mechanisms in the body and based on genetic sequences for the identification and treatment of life-threatening diseases.

Conclusion

The medical innovation sector is severely misaligned from the technology sector due to sharply declining earnings and as a result of sector rotation that hurt the health care sector in 2023. However, this misalignment has created excellent opportunities for the value-seeking investor.