AI’s Healthcare Revolution: $HIMS $OSCR $NVO $LLY Uncovered

The notion that artificial intelligence will be a defining force in the healthcare sector is gaining considerable traction, a thesis recently articulated by the analyst StockTrader_Max, who pointed towards significant potential in several names. This perspective often groups together disparate companies under one thematic umbrella. However, a closer inspection of firms like Hims & Hers Health (HIMS), Oscar Health (OSCR), Novo Nordisk (NVO), and Eli Lilly (LLY) reveals not one, but two fundamentally different narratives unfolding. One is a story of technology-first disruptors aiming to reshape patient and insurer interactions from the ground up; the other is a tale of incumbent giants adopting AI as a powerful tool to fortify their existing empires. Understanding this distinction is critical to navigating the opportunities and, more importantly, the distinct risks each path presents.

The New Guard: Healthcare as a Technology Problem

At one end of the spectrum sit Hims & Hers and Oscar Health. These companies are, in essence, technology platforms that happen to operate within the healthcare industry. Their core proposition is not a new molecule or a medical device, but a supposedly superior user experience built on data, digital access, and operational streamlining. Hims & Hers leverages a direct-to-consumer telehealth model, using AI and data analytics primarily for customer acquisition, personalisation of treatment plans, and retention. Oscar Health, an insurer, was built on the premise of using technology to simplify the byzantine processes of health insurance, employing algorithms for risk assessment, claims processing, and member engagement.

Their success hinges on metrics familiar to any technology investor: customer acquisition cost (CAC), lifetime value (LTV), user growth, and the notoriously long and often painful path to profitability. The investment case is predicated on achieving scale rapidly enough to overwhelm the high fixed costs of their platforms and the variable costs of marketing. While AI can certainly enhance their models, it does not absolve them from fundamental business challenges. Regulatory scrutiny over telehealth practices, intense competition, and the fickle nature of consumer sentiment introduce significant volatility. They are playing a high-risk, high-reward game of disruption.

The Old Guard: AI as an Industrial Catalyst

In stark contrast, Novo Nordisk and Eli Lilly represent the global pharmaceutical establishment. For these titans, AI is not the core product but a strategic accelerant. Their current market dominance and staggering valuations are overwhelmingly driven by the success of their GLP-1 agonist drugs for treating diabetes and obesity, a market experiencing exponential growth. Here, AI’s role is more industrial and arguably more profound in the long term. It is being deployed across three critical domains:

• Drug Discovery and R&D: AI models can analyse vast biological datasets to identify promising drug targets and predict compound efficacy, potentially shortening the preclinical phase of development by years and reducing the high failure rate of candidates.
• Clinical Trial Optimisation: Machine learning can improve patient selection for clinical trials, predict outcomes, and monitor data in real-time. This can lower trial costs, which often run into the hundreds of millions of pounds, and accelerate the journey to regulatory approval.
• Manufacturing and Supply Chain: For products with demand as intense as that for Wegovy and Zepbound, AI-driven predictive analytics can optimise complex global supply chains, improve manufacturing yields, and reduce costly production bottlenecks.

For these firms, AI is a tool for enhancing productivity and widening their competitive moat. It is less about acquiring a new user and more about getting a blockbuster drug to market 24 months faster or squeezing another 2% of efficiency from a multi-billion-pound production line.

A Tale of Two Valuations

The financial profiles of these two groups underscore their fundamental differences. Analysing them with the same lens is a category error. The disruptors command valuations based on future revenue potential, while the incumbents are valued on current, massive cash flows, with their AI initiatives representing future margin and growth security.

Data sourced from multiple financial data providers as of mid-2024 and is subject to market fluctuation.

The table reveals the chasm. Hims & Hers trades at a lofty forward P/E, reflecting expectations of future profitability, while Oscar Health is not yet profitable. Their valuations are more sensitive to revenue growth than to earnings. Conversely, Novo Nordisk and Eli Lilly trade at high, but justifiable, earnings multiples given their drug pipeline dominance. Their higher Price/Sales ratios reflect the market’s confidence in the extraordinary profitability of their core products, a profitability AI is expected to defend and expand.

Final Thoughts: Mispricing the AI Contribution

The broad assertion that AI will revolutionise healthcare is undoubtedly correct. The global market for AI in healthcare is forecast to expand at a compound annual growth rate of 36% between 2024 and 2030.¹ However, investors must look beyond the theme and analyse the mechanism of impact. The risk with the tech disruptors is that the market is pricing in the promise of AI-driven efficiency before the underlying business models have proven their long-term viability and profitability.

This leads to a concluding hypothesis: the market may currently be mispricing the nature of the AI contribution across these two groups. It could be over-attributing near-term value to the technology platforms, which still face fundamental execution and competitive risks, while simultaneously underestimating the long-term, compounding value that AI will deliver to the pharmaceutical giants. The durable alpha may not come from the company with the slickest app, but from the one that uses AI to quietly revolutionise the brutally expensive and time-consuming process of discovering and manufacturing life-changing medicine.

References

1. Barchart. (2024). Artificial Intelligence In Healthcare Market to Reach USD 196.91 Billion by 2030, Driven by Diagnostics and Imaging Applications. ↩

StockTrader_Max. (2024, June 17). I love healthcare stocks here… So much upside potential in so many names, healthcare will be the biggest winner from AI imo… $HIMS $OSCR $NVO $LLY. [Online forum post].