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#53 - Taking the pulse of the health care sector

The S&P 500 has garnered a commendable return of over 13% since the year’s outset. A closer examination reveals a pronounced sector divergence. Sectors like communication, technology, and consumer discretionary have demonstrated robust performances, while, in contrast, the health care sector has declined year-to-date.

What underlies this trend, and does health care present a value opportunity?

Currently, healthcare companies must navigate approximately 600 regulatory requirements, affecting a wide range of professional domains, from pharmacies to insurance companies and cloud service providers. Consequently, the industry faces an annual cost pressure of roughly $39 billion.

It's not surprising that investors and the market view the healthcare sector with trepidation, anticipating potential disruptions. The healthcare industry is subject to more regulation than most others, with the U.S. leading in the sheer volume of legislation, including the Health Insurance Portability and Accountability Act (HIPAA), Anti-Kickback Statute and Stark Law, the Health Information Technology for Economic and Clinical Health (HITECH) Act, and the Affordable Care Act (ACA).

Factors like compliance cost pressures, persistent high inflation rates, labor shortages, a shift in the payer mix toward Medicare, and the transition of COVID-19 to an endemic stage have made 2023 a challenging year for the healthcare sector thus far. According to McKinsey & Co research, the healthcare profit pool expanded at a compound annual growth rate (CAGR) of 4% from 2021 to 2022, but projections for 2023 are not optimistic.

Revenues for commercial and Medicare Advantage segments, physician offices, healthcare services and technology, and specialty pharmacy segments are anticipated to grow the most rapidly. Conversely, the prognosis has dimmed for general acute care and post-acute care within providers, and for Medicaid within payers.

Note: FBS: fixed-benefit and supplemental; PBM - pharmacy benefit manager; PBA – pharmacy benefit administrator.

Source: McKinsey & Co Research

Note: FBS: fixed-benefit and supplemental; PBM - pharmacy benefit manager; PBA – pharmacy benefit administrator. Source: McKinsey & Co Research

Looking ahead to the next six months or by mid-2024, the technology sector is expected to outperform healthcare. As a more nuanced analysis, we will closely monitor tech companies active within the healthcare sector. Tech giants, with $500 billion in cash reserves, clearly surpass the $200 billion held by pharmaceutical leaders, or health tech enterprises investing in technology and platform-enabled ecosystems.

Deloitte's analysis of PitchBook's health tech funding database reveals that in 2022, eight of the top ten later-stage funded companies are involved with platform-enabled ecosystems. These ecosystems may facilitate the industry's transition by leveraging data, forging community partnerships, and prioritizing end-users, including clinicians and consumers.

Bottom Line: The Healthcare sector continues to be under pressure from valuation and structural reasons, and we consider that it is still shy from levels where risk premia is correctly rewarded. As one of the sector with the lowest sensitivity to the recent bear market rally, we believe the trend will continue to mid-2024 or the point-in-time when rate cuts become reality, and concentrate on analysing health tech firms or related technology providers.

Good Luck

Team MacrometR

No Financial Advice. For illustrative purposes only.

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Concise but complete overview of the healthcare sector

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