Healthcare: Broad Trends and Business Concepts for 2012
Last year we published an overview of trends for the 2011 JPMorgan Conference. Here is a very brief review from this year’s Conference:
- The lagging Life Science Tools sector was ignited by new sequencing and genetic analysis products from Life Technologies (LIFE) and Illumina (ILMN). NIH and academic budget concerns are in the background for now but 2013 sequestration budget cuts are an issue. New markets and apps for consumer and translational medicine are a medium term opportunity.
- Large Cap Pharma and MedTech are following the IBM financial engineering strategy: Control costs, raise money through low i debt (3.5-5.5%)offerings, buy back stock and protect dividends. Leverage balance sheet.
- New Dx and tools products are platform technologies with razor/razor blade products with reagent rental plans that do not require capital investment . Old strategy with new products.
- Strong M&A trend balances riskier internal product development if deals are available. M&A drives stock prices as anyone anytime can be in play.
- Macro and sovereign debt concerns move to the the background as technology and revenue growth de-couple equities from debt.
- Medium term issue Health Care Reform : mandate for ACO (Accountable Care Organizations) and value based treatment puts squeeze on fee for service.
- Medium term issue: Medicare and Medicaid cuts are looming
- Many companies see an opportunity in chronic disease management like asthma, cardiovascular and diabetes which are huge consumers of healthcare. The right product/system can benefit from healthcare reform in these disease areas.
- Personalized medicine and targeted therapy gains strength for cancer. Companion diagnostics gain traction as collaborations are being announced.
- Mid and Large cap pharma show strong revenue growth in emerging markets.
- Big biopharma pays up for clinical stage HCV assets: Gilead (GILD) deal for Pharmasset (VRUS) at $11B; Bristol offer for Inhibitex(INHX) in competitive bidding at $2.5B. The market cap for other HCV biotech players are Achillion($12.77) $899B, Idenix (IDIX $14.10) $1.36B and Vertex (VRTX $36.60) $7.65B. A corollary from the HCV landscape is that deals are being done at an earlier clinical stage even Phase 1. 160M people are infected with Hepatitis C virus worldwide and 3.2M in the US.
We wrote earlier about the “January Effect” whereby small cap and life science stocks rally from Q4 to Q1 of the following year. The bellwether biotech ETF IBB ($111.67) is up 7% YTD and 12% over 30 days. It could be that the strong biotech market of 2011 is a result of less VC and earlier stage funding over the past 3 years. There are fewer companies in an attractive sector of healthcare.