Will Healthcare Continue to Outperform in a Weakening Market?

At this year's JP Morgan healthcare conference, there were the usual receptions, "speed date" meeting schedules, crowded hallways, busy restaurants, the rumors of "protestors," and overpriced hotel rooms.  But there was also a sense that maybe the roll that healthcare has been on may be slowing.  The boon has been fueled by both long term and short-term factors and it is the short-term factors that may be starting to fizzle out.  The trend toward inversions that has driven many of the largest deals in the sector may be peaking as Congress takes an increasingly dim view of the practice although some deals will still be rushed through in the first half of this year as companies try and take advantage of the distraction of a Presidential campaign.  The stimulus to the industry provided by the HI-TECH act and the Accountable Care Act has largely washed through the system.  And most of the companies with products in advanced (PII or better) have already taken advantage of the booming market to go public or get acquired.

There is no doubt that healthcare has been on a roll over the last 5 years.  The sector has outperformed in almost every metric against some very stiff competition from the Tech sector especially (see below).  As the market overall is clearly weakening as we enter 2016, the question is whether outperformance in a strong market will turn into underperformance in a weak market.  The good news is that while no sector is likely to keep up the pace set by the bull market of the last 5 years, the healthcare sector has some basic underlying strength created by long-term demographic trends, the continued advance of innovation and a favorable overall political climate.

• Over the last 5 years, healthcare stocks have outperformed every other sector and all market indices.  Healthcare related stocks are up 128% vs. 78% for Technoogy and 50% for Financials.  Nasdaq is up 89% and S&P 63%.
• That is because revenue and earnings growth for healthcare companies has outpaced the market as a whole - in 2016 companies in the S&P 500 are projected to grow revenues by 5.2% and earnings by 5.6%.  Healthcare-related companies are projecting growth of 7.4% in revenue and 8.1% in earnings.
• Growth investors are increasingly "overweight" in healthcare with an average of 20% of their holdings in the sector.
• In 2010, IPOs of healthcare companies were 11% of the total and raised 8% of the total capital raised.  In 2015 in a shrinking pool, those numbers were 41% and 22% respectively making it the most active sub sector in 2015.
• Biopharm was the most active sector with 61% of total sector proceeds in 2015.  Most (70%) of those issuances were supported with "cross over" or pre-IPO raises.  
• As of January 15th, 22 healthcare issuers are currently publicly on file with a large backlog pending.  The 22 represent 2 MedTech/Diagnostics, 5 Services/IT and 15 biotech/Pharma/specialty Pharma. 
• Reflecting the overall softening of the market, in the last quarter of 2015, trading performance post-IPO dropped from 2.4x to 1.1x.
• Follow on issuances were very strong in 2015 with a record high volume of $39 B - 2.5 x the previous record of $16 B in 2014.
• Global healthcare M&A was up 76% over the previous record in 2014 - driven in part by an increase of the "mega-deal" with 13 deals valued at more than $10 B especially in Pharma/biotech.

Most of this data came from an excellent presentation by JPM bankers during the conference. Also, Bloomberg, Factset, Morningstar, Lipper FMI, Dealogic, Company Filings

In the Arena

What is it we would like said about ourselves as leaders?  Hard worker. Fact-driven. Sensitive to the perspective of others.  Capable of walking in other people's shoes and seeing the world through their eyes.  Gracious. Driven. Smart.  Communicative.  Visionary.  Trustworthy.  Fearless.  Decisive.  There is likely to be solid agreement that these are good - even necessary - attributes for a successful leader.  But there is one trait that is absolutely essential.  One that every single leader of import and impact has exhibited.  Perserverance.  If you lead, you will inevitably fail.  You will inevitably be criticized.  You may even face disgrace.  You will face sacrifices and setbacks.

One of my favorite quotes of all time epitomizes the type of perserverance that is needed to take you forward.  It is from Teddy Roosevelt's famous 1910 speech at the Sorbonne, "The Man in the Arena."

"It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better.  The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly...who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement and who at the worst, if he fails, at least failed while daring greatly, so that his place shall never be with the cold and timid souls who neither know victory nor defeat."   

The question we all need to ask ourselves  as we consider whether we are prepared for leadership is whether we are willing to enter the area - to dare greatly, to know the great enthusiasm and the great devotions, and to spend ourselves in a worthy cause.  Because if we do, we will likely know the triumph of high achievement.  And that is the true fulfillment of leadership. Not the money or the titles or the awards or the recognition.  But to get in there and get your face marred by dust and sweat and blood and to know that you used up your essential strength and energy in the pursuit of a grand goal.

Why CEOs Should Read Dr. Seuss

The other day I was putting together a tribute to my daughter for her 8th grade graduation class book.  Along with pictures of her cute 3-year-old self and her 13 oh-so-grown-up self, I was looking for some quotes that reflected that lessons that I hoped she was taking forward with her to the right of passage that is high school.  After agonizing for awhile (it was much easier to pick out the photos), I remembered one of the books I used to read regularly to her and her older sister.  It was certainly one of my favorites and - I think - theirs.  Right up there with "Click, Clack, MOO" and "When you Give a Moose a Muffin."  While I loved those too, I loved to read them, "Oh, the Places You'll Go" by Dr. Seuss.  While the larger message of the story may have been a little weighty to absorb for young children, it was certainly clear to me.  And it was a rare time reading it that I didn't end with a lump in my throat.

I took the book from her bookshelf and sat down to find the perfect quote - 5 lines of wisdom that would fit in a half-page ad.  But while reading it, I realized that the wisdom in that Dr. Seuss book was just as important for me in my journey as a CEO and business leader.  The core messages - that everyone faces obstacles and times when they feel lost and all alone -  is one that is critical for anyone trying to build and lead companies and lead a life of accomplishment.  It seems the qualities of perseverance and tenacity matter as much for Buxbaum, Bixby, Bray and Mordecai Ali Van Allen O'Shea as they do for anyone else with grand plans and big dreams.

The happy places and detours and dead-ends that Dr. Seuss describes - The Place Where Boom Bands are Playing, the Great Heights where High Flyers are Flying....as well as the Not-So-Good Streets, The Weirdish Wild Space and the terrible, dreaded Waiting Place - are all places and stages that I recognize.  All of this serves as a reminder that the good times will always be somewhat fleeting and that the inevitable Bang Ups and Hang Ups that lay ahead  are there to teach us valuable lessons along the way to our next triumph.  That is if you find the fortitude to stick to it and work hard to UnSlump yourself.

After finishing the story, I put the book back on MY bookshelf.  I reflected on the Hakken Kraks I had vanquished and the ones that lay ahead.

I plan on reading it at least 1x year.  These are lessons that I need to remember as much as her.  And I know we will both succeed, it is  98 3/4 percent guaranteed.

http://www.amazon.com/Oh-The-Places-Youll-Go/dp/0679805273
https://www.goodreads.com/work/quotes/2125304-oh-the-places-you-ll-go