Allocator Quarterly Q4 2018

This AQ focuses on the significant shifts the Health Care sector has experienced in the last decade, particularly affecting the product-focused industries such as pharmaceuticals and biotechnology, as well as the drivers for the development of the sector going forward.

[CITE AQ – Q4 2018]

The Health Care sector globally has undergone a quiet revolution in the last decade. Regulatory changes in the US with the introduction of the Affordable Care Act by the Obama administration in 2010 on the one hand, with on the other hand continued regulatory adjustments across all Western markets with increased focus on “value” for patients and the ominous “patent cliff” with its ripple effects still working through the sector as we speak, have hit and their effects have been absorbed by the Health Care sector as a whole, for it to emerge as one of the best performing sectors of the last few years globally.

This was accompanied with the M&A deal frenzy of the last few years, in part spurred on by tax changes in the US in the last year, along with the emergence of China as a global player in the Health Care M&A space, and finally technology driven changes in how R&D is conducted, with significant advances in fundamental science.

A decade ago the sector was considered the “sick” sector of the global economy, with innovation on the decline as measure by productivity of R&D dollars, and the decrease in the number of new molecular entities approved by regulators. The sector was facing an uphill struggle to preserve top line revenue with the advent of the “patent cliff”, and has had to evolve and adapt to thrive.

Today, the sector has been transformed, having embraced modularization at most stages of R&D and production, with the use of Contract Research Organizations, M&A, alliances and partnerships across the industry, as well as Contract Development and Manufacturing Organizations.

New players, such as Biotech, have grown to represent a significant part of the Health Care sector, transforming the science of medicine making. These elements together have increased the pipeline of R&D across the biopharmaceutical subsector. The regulator in the US has also put increasing focus on a collaborative approach and accelerated pathways to approval, in order to facilitate a rise in the number of active substance authorizations. At the same time, headwinds for the sector remain, with unrelenting threat from generics and biosimilars, the continued government and payers scrutiny on pricing, and regulator attention to preventing anti-competitive practices.

With the looming increases in interest rates which will invariably increase the cost of capital and may further dampen the buoyant Health Care sector, investors may wonder whether valuations in some instances have become significantly stretched and expect a continued pull back on the back of the October and November sell offs. Also, the newly re-introduced trade tariffs between US and China are likely to require supply chain adjustments in the biopharmaceutical subsector, because of its global footprint.

Despite the near-term obstacles, the long-term trends will continue to provide support to the sector, among which the aging global population, the increased incidence of chronic disease across the emerging economies, as well as the introduction of universal health coverage in many countries. The future of the Affordable Care Act in the US is still unclear over the near term, as the current administration has worked to limit its reach. However, it has been doing so to a much lesser extent relative to the harshness of the rhetoric during the 2016 presidential campaign, so there may be hope for the ACA structures to remain with us for the long term.

Finally, the nature of health care itself is also changing with the emergence of integrated care facilitated by the use of technology and digital diagnostics. The increasing focus on the patient as the consumer who is in control of their health and treatments, and the focus on consumer choice has been a central pillar supporting the emergence of the digital health technology sub-sector. This digital health technology stream has enjoyed a strong wave of VC funding and has invited many corporate M&A deals in the last 18 months. The foray of the likes of Amazon into the health care space has created further disruption to the comfortable status quo in the sector.

The health care sector is accustomed to continually adapting and exercising agility to preserve its top line revenues and control costs. It will need to continue using its agility in order to stay competitive.

We look forward to hearing from many of our readers with more insights into and views on the health care sector, and engaging into a debate on its future.