The inclination to form an overarching view of the broader healthcare industry can be premature and costly. Understanding the drivers of the various sub-sectors (pharma, biopharma, medical technology, drug distributors) helps investors avoid any potential landmines and, just as importantly, allows them to identify great investment opportunities. The remarkable volume of recent healthcare bond issuance – mainly but not exclusively in the medical technology sector – has made us reflect on these nuances.
As we go into US election season, prospective policy reforms designed to make the US healthcare system more affordable and transparent have taken centre stage. It helps to remind us of the complexities underlying the sector as well as how politically sensitive it can be. Pricing reforms, litigation risk, patent cliffs, the rise of generics and ‘biosimilars’ often put investors off the whole sector, and perhaps wrongly so. There is always a hidden sweet spot. One sector insulated from some of these risks is the medical technology (medtech) space.
Whilst the sector’s product offering – ranging from syringes to surgical robots – may see some limited negative pricing pressure as hospitals and healthcare systems are always on the lookout to lower costs and capex, medtech companies are generally immune to the mighty, headline-grabbing, challenges faced by pharmaceutical companies. They don’t provide drugs that are price-pressured by either regulation or competition, they don’t provide products that are facing major patent losses, and generally they don’t suffer from large-scale litigation cases either (though product failures such as the recent pelvic mesh issue has claimed some victims). Indeed, in the absence of such noise, these companies have been increasingly building on data and innovative technologies to leverage the great opportunities provided by favourable demographic trends such as ageing populations and the rising middle class in emerging markets. Unsurprisingly, to fuel and complement the often high-single-digit organic growth and achieve greater scale, companies in the sector have been fairly active in deal-making, which has kept bond investors on their toes.
Multi-year de-leveraging stories from Becton Dickinson and Abbott Laboratories have largely played out (and others such as Thermo Fisher Scientific and Stryker remain committed to mid-sized bolt-on M&A, implying elevated supply risk). But there have still been a few opportunities to add exposure to the sector. Recent examples include Danaher (its recent jumbo deal in euros and US dollars helped finance its GE Biopharma acquisition). Also attractive is Fresenius Medical Care, which is the largest (and only vertically-integrated) dialysis provider in the world, and which is strongly-aligned with the recent Executive Order to expand home-dialysis in the US.
As a result of the recent bond issuance, the medtech sector has nearly doubled in size as a proportion of the broader euro corporate index. Going forward, whilst supply should dial down into year-end, we expect the underlying trends to remain intact in 2020, manifesting in additional M&A and a healthy supply of new issuance. We remain constructive, based on the relatively defensive nature, the favourable demographic trends, and the untapped opportunities in data and improving technology that these issuers are capable of exploiting.