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The healthcare industry: at the dawn of a new era

Nos Experts

Driven by positive sociodemographic factors in developed and emerging countries and by a surge in innovation, healthcare has a bright future ahead.

Frédéric Ponchon

The healthcare industry is benefiting from long-term structural trends, but also from near-term factors of a more cyclical nature.

From a structural point of view, the sector is driven by powerful sociodemographic factors that are unlikely to revert.

In developed countries, the ageing population comes with a rising number of pathologies caused by longer life expectancy, including a significant increase in chronic diseases such as diabetes or high blood pressure.

In emerging countries, the expanding middle class, but also the implementation of healthcare systems, support the sector. In China for instance, reforms to the health systems introduced in 2009 designed to improve access to healthcare services and to western medicine have led to an increase in health related expenditure. This is an integral part of the government’s ambition to transition the country’s economic model to one driven by domestic consumer spending - notably by reducing precautionary savings in China.

From a cyclical perspective, after a rather soft decade in the 2000s, we are heading towards a new period of growth marked by a surge in innovation.

Heading towards a new period of growth marked by a surge in innovation

From a cyclical perspective, after a rather soft decade in the 2000s, we are heading towards a new period of growth marked by a surge in innovation.

In 2014, a record number of new drugs were approved by the Food and Drug Administration (FDA), with 41 authorisations for sale delivered versus 26 per year on average over the past 10 years. This was the highest level seen since 1996.

The industry regularly experiences “waves” of innovation; and today the first commercial applications of the human genome project – which dates back to the early 2000s - are coming to the market.

²At the same time, after years of poor returns on investment, the actual organisation of R&D has been rethought. Today, and for most of the large pharmaceutical companies, R&D has opened up and combines proprietary research with academic partnerships or collaboration with smaller biotech companies. This new way of working has contributed to the huge renewal of pipelines, and has also partially “derisked” investments through the licencing of therapies that are already at an advanced stage of development. These renewed product portfolios, at a time when the wave of patent exclusivity losses experienced by the industry in early 2010 is coming to an end, should lead to an acceleration of organic growth in the mid-term and thereby contribute to the continued expansion of multiples.

Financial signs are pointing in the right direction

During this period between 2010 and 2014, when many high added value drugs lost their patents, pharmaceutical companies sought to improve the diversification of their business mix and their revenues by conducting acquisitions or asset swaps.

They also considerably improved the efficiency of their cost structure, which had not been a priority in previous years. The industry has undergone considerable change and is now in a position to generate sustainable and profitable growth.

The sector’s ability to generate high cash flows is a further attractive characteristic, as it provides the flexibility needed to carry out acquisitions – it is estimated that European pharmaceutical companies are able to raise over €120 billion for M&As - pay out generous or even exceptional dividends, or buy back their shares.

Pressure over the price of drugs is a recurring issue, particularly in the United States where the presidential election campaign is under way. This problem could fuel volatility for the sector in the near-term, as lowering the cost of healthcare is a frequent election-driven battle during the Democrat primaries. However we do not believe this issue to be particularly threatening for the pharmaceutical industry.
It seems unlikely that the measures suggested will materialise due to the power of lobbying and the huge political challenge of passing such reforms…

If drugs are the most visible component of healthcare costs, they only account for 10% of all health expenditure in the United-States. There are other more efficient ways of improving cost efficiencies. Furthermore, the industry is able to absorb a reasonable drop in prices by making further improvements to its cost structure. However to support prices, it is crucial that the new products that are brought to market offer truly disruptive improvements to patients’ life expectancy and wellbeing.

The opinions and estimates constitute our judgment and are subject to change without notice, as well as assertions about trends in the financial markets, which are based on current conditions in these markets. We believe that the information provided in these pages is reliable, but it should not be considered exhaustive. These data, graphics or extracts were calculated or made on the basis of public information we believe to be reliable but which nevertheless have not been subject to independent verification on our part. Your attention is drawn to the fact that any prediction has its own limitations and that therefore no commitment is made by Sycomore Asset Management as to the achievement of these forecasts. This publication is not intended to be an offer or solicitation for the purchase or sale of any financial instrument whatsoever. References to specific securities and issuers are for the purpose of illustration only and should not be construed as a recommendation to buy or sell these values.

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