Why is the health and wellness industry set to grow at 10.9% CAGR by 2031?

The health and wellness theme involves a blend of active lifestyle stocks, food and beverage companies, and cutting-edge medical and biotechnical stocks, all of which stand to be augmented by the development of new therapies and a move towards licensing treatments, such as psychedelics for mental wellbeing.

•  Health and wellness set for 10.9% CAGR through 2031.
•  Eli Lilly reveals promising trial results for weight loss pill.
•  How to invest in health and wellness: the Global X Health & Wellness ETF is up 8.6% year-to-date and holds a range of health and wellness stocks.

Among the fad diets and celebrity endorsements, a clear pattern can be discerned: a long-term, secular shift towards healthier, more active lifestyles.

Flora Liu, client portfolio manager of thematic equities at Pictet Asset Management, told Opto that there are three “buckets” that the firm considers when investing into the trend.

The first covers “preventative measures, such as healthy eating, exercise, active lifestyle and early diagnostics”. The second covers different kinds of treatments, including innovative therapies such as drugs which outperform previous versions and treat increasingly complex diseases. The third bucket consists of health enablers: services that help consumers to get better access to health, or services that help healthcare providers to be more efficient and cost-effective.

Pictet’s investments typically target a three- to five-year time horizon, but this theme, according to Liu, is set to be a “multi-decade trend”.

Indeed, Research and Markets estimates that the industry will grow from $4.7trn in 2021 to $12.9trn by 2031, at a CAGR of 10.9%.

There is, however, a danger of faddishness. Peloton’s [PTON] stock rocketed over 450% within the first year of the Covid-19 lockdowns, before crashing to 52% below its debut value by June 2022 as sales tanked.

Last month, Peloton revealed a further 13% year-over-year sales decline, with losses at its UK arm more than doubling to £210m.

True innovation and value delivery are, therefore, key to successful plays within the health and wellness theme, but those businesses that can deliver on both fronts have the potential to deliver lasting benefits.

Lilly expands into weight loss

Eli Lilly [LLY], best known for its insulin, is poised to enter the market for oral GLP-1 treatments. GLP-1s, originally diabetes treatments, have been repurposed as weight loss therapies, championed by celebrities like Elon Musk for their appetite-suppressing properties under brand names including Wegovy and Ozempic.

GLP-1s are currently taken via injection from single-use pens, which have been facing supply issues due to their sudden rise in popularity. With major drugmakers all scrambling to produce an oral treatment as soon as possible, Novo Nordisk [NOVO-B.CO] is leading the race, with a treatment already having passed phase three clinical trials.

However, Lilly’s phase two results demonstrate a superior efficacy profile, with patients who take the drug losing up to 14.7% of their body weight after 36 weeks, compared to the 15.1% after 68 weeks clocked by Novo Nordisk during its phase three trials.

Despite the celebrity hype that has buoyed the rise of such treatments, Grégoire Biollaz, senior investment manager at Pictet, considers these a valuable addition to the health and wellness theme. “Obesity is a disease,” he told Opto; historically, “the only way to get weight loss of over 20% was through bariatric surgery, which is quite a tough procedure for the patient.”

The ability of these drugs to achieve or even beat these outcomes, without surgery, is transformative. “It’s not just obesity”, says Biollaz, but also related health issues such as renal disease, joint failure and heart disease, that can be mitigated through the proper use of these treatments.

Intelligent outcomes

Liu and Biollaz both make clear the extent to which the health and wellness megatrend is buoyed by technological developments.

Artificial intelligence (AI), for example, is accelerating the speed at which new drugs can be discovered. In June, a Hong Kong-based biomedical start-up called Insilico Medicine began mid-stage human trials of a drug, INS018_055, that was discovered and designed by AI.

Insilico’s Generative Tensorial Reinforcement Learning AI system is reported to have reduced the drug discovery time from three years to as many weeks.

Elsewhere, companies like Intuitive Surgical [ISRG] are having a transformative impact on patient outcomes from surgery by using AI-powered robotics to train and assist surgeons. The company recently announced a new robotically-enhanced surgical training program in Newcastle.

Robotic surgery can even be tailored to individual surgeons: “You can have a tool that's dedicated to each surgeon”, says Biollaz, with machines able to identify relative weaknesses between different surgeons and improve their techniques.

Wellness tailwinds

For Biollaz, Covid-19 accelerated a global, secular shift that was already gaining momentum. During the pandemic, “people realised how important it is to be healthy”.

This has coincided with the rise of technological health enablers other than AI, such as mental wellbeing apps and wearable technology. Fitbit, owned by Alphabet [GOOGL], kick-started a trend that has empowered consumers to take ownership of their own health and wellbeing.

People are “more informed about the importance of health in the pandemic,” said Biollaz, “and also have the tools to measure their health… They are more informed about healthy food, the impact on their body and the impact on the longer health span.”

Pictet’s approach when investing into its funds, which include health and biotech, is to identify, as Liu points out, “not just near-term [micro] trends, but decades-long, macro megatrends”. The theme’s cultural and demographic tailwinds are augmented by technological advancements, such as advanced gene editing, and increasing spend by governments and consumers on health care.

A mushrooming theme

Elsewhere in the wider health and wellness industry, an emergent trend set to open new opportunities is the therapeutic use of psychedelics. Tandava, a wellness retreat in Tepoztlán, Mexico, for example, offers visitors sessions induced by Bufo Alvarius 5-MeO-DMT, a tryptamine psychedelic extracted from certain plants and the glands of the Colorado River toad.

Psychedelics are also poised to enter mainstream medicine. On 1 July, Australia became the first country in the world to legalise the prescribing of MDMA and psilocybin — the main psychoactive components of ecstasy and magic mushrooms, respectively — for therapeutic purposes. MDMA is approved for treatment of post-traumatic stress disorder, while psilocybin can now be prescribed for treatment-resistant depression.

Psilocybin is regulated for personal use in the US state of Oregon as of May, but psychedelics are not otherwise permitted in the US. While this could change over coming years, psychedelics have no widespread legal basis for clinical purposes at present, and as such most investors, including Pictet, do not include them as part of their investment thesis.

How to invest in health and wellness stocks

ETFs, or exchange-traded funds, offer an economical and diversified way to invest in a variety of stocks within a particular theme.

Fund in focus: the Global X Health & Wellness ETF

The Global X Health & Wellness ETF [BFIT] tracks the Indxx Global Health & Wellness Thematic Index, which is composed of companies aiming to promote physical wellness. As of 31 May, the fund’s assets were distributed as follows: 69.7% in consumer discretionary, 24.3% in consumer staples, 5.5% in healthcare, and 0.5% in industrials. The fund is up 8.6% year-to-date.

Alternatives include the iShares Healthcare Innovation ETF [HEAL.L] and the Middlefield Healthcare Dividend ETF [MHCD.TO]. HEAL tracks an index focused on companies that are “pushing the boundaries in medical treatment and technology”, while MHCD is an actively-managed fund that was formed through a merger of Middlefield’s Sustainable Agriculture & Wellness Dividend Fund and its Health & Wellness ETF in May. The new fund tracks dividend-paying companies in the healthcare, life sciences and biotech industries.

HEAL is up 1.8% year-to-date, while MHCD is down 3.2%.