Until the latter stages of 2021, hitching your wagon to the broader macro-economic recovery as the world started to emerge from the Covid-19 pandemic appeared to have worked well for many investors, and markets more broadly. Then came inflation.
Months of back-to-back record-setting CPI data, paired with the ongoing conflict in Ukraine, as well as a pandemic that won’t go away easily, and suddenly, the headwinds facing investors are feeling a little more troublesome than they did even six months ago.
However, not all sectors are created equal. The healthcare industry, for example, appears to have largely resisted those headwinds, and in certain instances is even looking at some tailwinds.
Catching up and moving ahead
One well-documented secondary impact of two years under lockdown due to the Covid-19 pandemic has been the delay of elective surgeries and treatments, as well as a significant drop in cancer diagnoses and treatments.
Not only is there a significant backlog of treatments and procedures but those treatments are also likely to be more extensive, as patients will get diagnosed with more advanced stages of the disease.
Similar trends are expected in other therapeutic areas – such as heart disease, autoimmune conditions (e.g., MS or arthritis), and even eye disorders (e.g., macular degeneration). As a result, the pharmaceutical & medical device industry is poised for a sustained period of elevated demand.
This could reward companies that can develop faster, less invasive techniques and procedures, that can both improve outcomes and accelerate recovery times.
Biotechnology is another interesting space in the healthcare sector. The innovation at a drug and treatment level alone – with the rise of technologies such as immunotherapy to treat cancers – could be a gamechanger.
M&A activity
A key element of the biotechnology market today is the sheer amount of ‘dry powder’, or cash reserves, the biotech giants like Pfizer, Merck, and others have at their disposal.
It was recently reported by Jefferies that the top 20 pharmaceutical companies have nearly $300bn in cash on hand, as well as flat to declining revenues that need to be spurred forward by new technologies, discoveries and acquisitions.
We believe that $300bn is essentially enough capital to acquire the entire small-cap biotech market.
Other factors contributing to a potential increase in M&A activity in the biotech space are:
- The need to acquire new technologies to offset expiring patents
- Providing a boost to internal research and development, which has simply not kept pace with the innovation coming from smaller, more nimble or specialized companies.
- Taking advantage of selloffs like the one recently. This has historically spurred periods of accelerated M&A activity. In recent months, Pfizer has been particularly aggressive amid the recent pullback, as evidenced by its acquisitions of Arena Pharmaceuticals ($6.7B) and Biohaven Pharmaceuticals ($11.6B).
Not just pills and surgery
‘Healthcare’ as a sector covers a wide range of industries and sub-sectors. Devices and pharmaceuticals are, perhaps, the ones that most instantly jump to mind, but other areas are also poised to benefit from many of the same tailwinds.
One primary example is data management and software solutions.
The pharmaceutical industry, as mandated by regulators, must maintain extensive records, samples and documentation going back decades on all preclinical, post-clinical, and commercialised programmes.
Historically, this information had been stored in older mainframe computers. Like many other industries, cloud solutions have recently gained ground as a more efficient way of storing, managing, and accessing that information.
Practice management software, customer relationship management software, platforms for telemedicine, and even industry-specific networking software are all areas ripe for innovation.
Thinking near and long term
The inflationary and broader macro-economic pressures today have caused a significant turmoil and look likely to be around for some time.
Industries such as healthcare could provide some insulation against that. Historically, even in periods of high inflation, consumer spending or even business spending may go up or down but spending on healthcare stays more or less consistent. Ultimately, people need medicine regardless of how much their groceries cost.
Taking a longer-term view, in the United States, healthcare made up only about 5% of GDP in the 1960s and is approaching 20% today – pointing to the fact that as a whole, the healthcare industry has been on a multi-decade growth trajectory that doesn’t immediately appear to be slowing down.
Mike Clulow is a portfolio manager of the New Capital Healthcare Disruptors fund. The views expressed above should not be taken as investment advice.