Healthcare sector outlook

The healthcare sector is, by definition, a defensive and slow-moving sector. The sector shows expensive valuations and good fundamentals that may help outweigh poor relative strength.

Given this, healthcare has outperformed during the global market correction witnessed since November last year. However, we believe that the healthcare large-cap defensiveness is not offering sufficient upside potential for growth-oriented investors. Nevertheless, the latter can outperform on a relative basis. The COVID-19 tailwind that has helped push forward some start-up and testing names is slowly going away. 

COVID-19 was an eye-opener for the healthcare sector as time to the market can be reduced substantially. Therefore, one expects an acceleration in investment leading to an increased number of innovative products being pushed to the market. This is not yet reflected in the price of many stocks. Longer-term investors should seek the following investment opportunities:

1. Genomics: Advances in computing power and machine learning have contributed to material gains. Scientists have now detailed information about the nature of human genes and how human bodies are built. This will lead to faster turn-around and fast go-to-market times. 
2. Diagnostics and Beyond: New blood test methods can detect early-stage cancers and may lead to better patient outcomes, not to mention lower treatment costs.
3. Telemedicine: Telehealth and virtual care models have provided evidence of the healthcare benefits that can be delivered to patients. External providers such MSFT, GOOG, CRM, and AMZN will be key enablers in this field.

The macro environment is favorable to the healthcare sector as we transition into the next phase of the economic cycle. The sector has a good number of companies with strong balance sheets, outstanding profitability, and a sustainable outlook. 

Companies from sub-sectors such as big-pharma and medtech services have characteristics equal to value companies, yet their outlook is bright. On the one hand, we have growth-style healthcare companies trading at a premium to the sector but at a discount when compared to pure technology companies where valuations are toppish. 

Positives for the sector: 

•  Balance sheets are strong, with ample cash for dividends and M&A.
• Positive long-term demographic trends may support the sector, including an aging global population and a growing middle class in emerging markets.
• Demand is returning for elective procedures, drug sales, medical equipment and diagnostics.
• Valuations are attractive relative to the sector’s historical average.

Negatives for the sector:

•  High unemployment reduces healthcare insurance enrollment.
• Extended-care facilities have seen a decline in enrollments and are likely to see higher costs related to virus-mitigation requirements.

Investment opportunities:

The healthcare market is fragmented as its players strive to increase their market share through such strategies as improvements to existing solutions and software platforms, development of new platforms, and strategic alliances with other market players. Therefore, several players account for significant individual shares in the market.    While political risks for the sector have improved as the prospect of Medicare fades, there is still uncertainty about the outlook for drug price regulation.   As of today, we look at: Pfizer, GSK, Roche, Novartis, Bayer, AbbVie, Thermo Fisher Scientific Inc.,  and in an extended manner: Amazon, Microsoft, Alphabet, Salesforce