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