The overall outlook for the Healthcare sector is positive. As the population continues to age and demands more general and specialized medical care, one can expect business to remain constant in this sector of the economy. Robust balance sheets in the Healthcare sector indicate a high probability for continued positive economic activity into the outlook period which includes an increase in Mergers and Acquisitions (M&A) activity, frequent stock buybacks, and generally higher dividend payments.

Contrastingly, political advocation for cutting costs combined with general uncertainty in Washington, D.C., may lead to volatility in market pricing. However, the chance that legislative changes cause significant fluctuations in stock price is relatively low since potential reforms are at least somewhat already reflected in the current market. The relatively low P/E ratios of the sector indicate that companies are already trading at a discount. Exhibit 1 shows the performance of the Healthcare sector since 2016 relative to the overall economy, comparing sector revenue change to GDP growth from 2016-3Q2020.

Healthcare sector revenue totaled $2.7 trillion in 2018. While average annual growth totaled 2.7% from 2013-2018, the industry is expected to grow at an annualized rate of 1.7%-3.1% from 2019-2024. Sector growth is expected to be driven by an aging baby-boomer population, requiring more care in general. Increased funding for public programs such as Medicare and Medicaid will also drive sector growth. Experts expect that federal funding for Medicare and Medicaid will rise at an annualized 4.6% through 2024. Due to these catalysts and an increase in the overall efficiency of healthcare technology, Mergers & Acquisitions (M&A) and general investing activity alike are also expected to rise throughout the five years to 2024. Exhibit 2 shows the trends in investing activity from 2015-2020.

With the potential volatility from conflicting trends, firms have an incentive to strategically acquire new drugs and products to diversify their portfolios and make them more robust against unforeseen circumstances. In 2020, the Pharma sector saw seven “megadeals” through November 15 – defined as a transaction of at least $5 billion in value. For reference, Tech was the only sector that had more megadeals in 2020 with 11. In addition, the Fed’s Quantitative Easing policies in response to Coronavirus makes capital plentiful and accessible, making these deals very likely to materialize. The types of investments that are likely to pique the interests of management teams and investors alike are those in technology and in companies establishing strong environmental, social, and governance policies, which has become a growing imperative in the investment community with long-term sustainability and profitability in mind.

Some of the larger M&A deals of 2020 include, AstraZeneca and Alexion, Gilead and Immunomedics, Johnson & Johnson and Momenta, Gilead and Forty-Seven, and Sanofi and Principia Biopharma. AstraZeneca offered to buy Alexion for $39 billion as part of their strategic push into oncology and immunology. Similarly, Gilead’s acquisition of Immunomedics for $21 billion was also part of a push into oncology and immunology treatments. Johnson & Johnson’s $6.5 billion acquisition of Momenta added groundbreaking rheumatology drug Nipocalimab to its portfolio. In their second large transaction of the year, Gilead acquired Forty-Seven which held a patent for a biologic that treats several blood cancers. Sanofi added a promising multiple sclerosis drug to its portfolio with the acquisition of Principia Biopharma. In sum, the overall outlook for M&A in the Pharma sector appears extremely positive going forward. There exists a pronounced trend toward consolidation in the sector as a means to mitigate risk, acquire greater lobbying power, and expand revenue and earnings.

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