Investment banking head offers market outlook for 2021

The Jefferies Healthcare Temperature Check report is now in its third edition and published to coincide with the 11th annual Global Healthcare Conference which was held virtually.

Over 500 responses from senior leaders in the sector responded for this year’s report, giving views on both the current state of the market and predictions for 2021.

Tommy Erdei, Joint Global Head and European Head of Healthcare Investment Banking, Jeffries, discussed the event, the report and market challenges and opportunities ahead.

This is Jefferies’ 11th Global Healthcare Conference in London, but the first virtual one. What do you think some of the benefits of this year’s format were?

We were excited to hold our first virtual Global Healthcare Conference. In planning this year’s event, the most important thing was to ensure the safety of our clients, investors and people. We’re really pleased to have come up with a format that protected the health of those attending, while still offering the same opportunities to share information, network and meet with key players from the sector.

Although going virtual clearly required some adjustments, maintaining the feel of the conference was important to us. We acted quickly and decisively to keep some of the networking aspects through our digital platform, such as our virtual lobby that will allow delegates to mingle. There were some additional benefits. For example, people whose schedules may have made travelling challenging could join more easily.

Last year’s report suggested more M&A to come in 2020. How has this played out in reality against the backdrop of a pandemic and what do you expect in 2021?

We essentially saw a shutdown of M&A for about three months when COVID-19 hit. However, activity has now come back to significant levels and is gaining momentum. This is especially the case with private equity; given PE firms’ need to deploy cash there has been a renewed focus on those sectors and sub-sectors that have shown the most resilience to, and upside from, COVID-19.

The combination of the fact that Private Equity has been unable to use funds at the pace it budgeted for, and the shrinking size of the investable universe on the supply side, has brought into greater focus those assets that are more stable and resilient – which makes healthcare really well positioned. However, while it is private equity driving the pick-up, we are continuing to see a degree of caution from strategic buyers.

These dynamics have shown in situations kicking off over the summer. For example, Neuraxpharm and PCI Pharma Services, both of which Jefferies advised on, are two examples of heightened demand. Both of these established new valuation benchmarks in their sectors. In both instances private equity was the most competitive buyer, with a clear desire to get the transaction done at pace.

This need to get things done at speed has been helped by the virtual nature of processes, which has increased the ability to get transactions done more efficiently. Days and weeks are being cut out of timelines due to logistics such as travel being removed.

It is encouraging that healthcare stocks have outperformed the market over the last year. What are the drivers behind this and how do you view the outlook?

It’s certainly encouraging, and we believe the outlook remains positive. Arguably there are two key drivers.

Firstly, healthcare almost always outperforms the broader markets when there is economic volatility given the defensive nature of sector. The pandemic has had a bigger impact on demand than most situations, relative to other industries, healthcare is in – and will emerge in – a far better position. Additionally, certain components of the sector are very important solution providers and we are seeing additional demand in certain areas like pharmaceuticals and lab testing.

Secondly, within biotech the market has been very strong as large pharma companies continue to invest heavily in new areas of R&D. In particular, a number of companies are very focused on the vaccine.

The healthcare sector will play a critical role in supporting the recovery from COVID-19, are there any sub-sectors you view as particularly exciting?

The CDMO (contract development and manufacturing organization) sector has also been interesting due to the heightened focus on supply chains and getting raw materials or the finished product to the right place. The further away, the more challenging this is – due to the lockdown situation. At the height of lockdown, maintaining manufacturing operations was important, but it was challenging to do so in a way that protected employees. Those that were able to pivot and respond quickest have done well.

It is also worth highlighting In Vitro Diagnostics (IVD). The tests we read about daily in the news are made by IVD companies who have seen, in some cases, their revenues multiply.

Within biotech it will come as no surprise that there has been a resurgence of interest in vaccines and vaccine developers. We are also seeing the field of nucleic acid based pharmaceutical development getting a lot of interest from investors while gene therapy and cell therapy also continue to break new ground in their ability to treat and cure disease.

Looking ahead, where do you see the biggest opportunities and challenges for the next 12 months?

Clearly there is significant political uncertainty at the moment and this creates risk. As we know, healthcare has always been a sector of political focus and it will be interesting to see if the language and rhetoric we are hearing is translated into action. Long term, the impact of COVID-19 also represents a risk factor and its full ramifications will be unknown for some time.

On the more positive side, we see a plethora of opportunities. The investment activity we are seeing illustrates the critical nature healthcare plays across society, while awareness of some of the macro related risks highlight healthcare’s long- term attractions. It is a defensive and robust sector, but still with major growth potential. This may well attract further capital to the sector, to both fund innovation and increase resilience.


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