Health Sector – Perspectives in a Pandemic Era
The American, European, and Chinese healthcare sectors showed strong growth in the second quarter amid a recovery in consumer activity and prospects for further digitalization. 2021 has every chance of becoming a record year in the past few years for the number of licenses issued by the FDA. Particular market attention in Q2 2021 by the regulatory approval of Biogen’s Aducanumab, the first solution for Alzheimer’s patients in decades.
This situation has become very positive for both startups and prominent players, many of which recorded good results in the stock market in April-June 2021.
The FDA’s decision on Aducanumab sent a wave of criticism to the FDA for being overly loyal to companies in the face of not-so-convincing clinical trials. But, on the other hand, the biotech sector has received powerful stimulating support against this background and a signal that the FDA is ready to make certain compromises in the most problematic areas of medicine.
Investors should now be looking at companies operating in segments with unmet medical needs, as they increase the number of drugs and costs the most in the coming years. Among these, first of all, it is necessary to highlight oncology, immunology, and neuralgia.
New drugs awaiting FDA approval in the third quarter of this year include the pneumococcal vaccine V114 and the oncology drug MK-6482 from Merck, POD1UM-202 from Incyte, Sotorasib from Amgen, as well as several funds from small biotech startups.
European medical institutions are demonstrating a high rate of adaptation of new medical technologies in their daily activities. Furthermore, the introduction of electronic health records, prescriptions, and online consultations creates favorable prospects for telemedicine, analytics, and AI in the region.
The Chinese healthcare sector in Q2 pulled away from the broader market, proving investor confidence in the digital transformation of the industry. The introduction of 5G technologies and other innovations will solve the urgent problems in the country in the segment of first aid and strengthen collaboration between regional centers and leading medical clinics.
The sector is gradually catching up with the broad market.
For several large companies, Q2 is going very well. Since the beginning of the second quarter of 2021, the S&P 500 Health Care Index has outperformed the broader market, adding 7.01% (6.34% for the S&P 500). The health sector is proving to be the beneficiary of the American economic recovery.
Pharmaceutical and biotech companies launching new products (2021, by the way, has every chance of becoming one of the most abundant in recent history in terms of the number of approvals issued by the FDA) benefit from the return of business and consumer activity to normal, recording an increase in diagnostics.
In addition, the sector shows a gradual shift in consumer focus from drugs to counter the COVID-19 pandemic to common diseases, which is beneficial to a broader cohort of players.
Consumer spending in the sector is also showing strong growth and is close to pre-pandemic levels. Analyst firm Altarum has calculated that national health spending in the United States in February 2021 was only 0.3% (y / y) less than the level of February 2020, the last pre-pandemic month.
At the same time, the share of the sector in US GDP in February 2021 even increased to 18%, 17.9% a year earlier. Such favorable trends predetermined the positive dynamics of a whole group of the most prominent representatives of the sector on the US stock market.
What segments should you pay attention to?
The COVID-19 pandemic predetermined the pace of development of some branches of medicine in the coming years: most analysts believe that this will primarily concern the development and commercialization of vaccines. IQVIA’s Global Medicine Spending and Usage Trends: Outlook to 2025 highlights that CAGR in the vaccine segment 2020-2025 will exceed the same indicator for 2015-2020.
The two leading areas of medicine until 2025, according to IQVIA forecasts, will be oncology and immunology, with an average growth rate of expenditures in each of them of about 9-12% annually. At the same time, the oncology sector can launch nearly 100 new drugs on the market over the period, contributing to an increase in costs to $ 260 billion by 2025.
Focus-2021: drugs on approval in the third quarter
On June 7, Aducanumab, a potential blockbuster drug for Alzheimer’s disease from Biogen, was approved by the FDA, which propelled the stock soaring by more than 60% at the moment. We will discuss this case in more detail later.
In the third quarter of 2021, the FDA will review a group of drugs to approve their use in the United States.
Merck is pending review for the 15-valent pneumococcal V114 vaccine on July 18, 2021. Approval is pending to prevent pneumococcal infection in adults 18 years of age and older, but Merck is continuing its research into the possibility of giving V114 to children.
The drug targets thrombotic microangiopathy that occurs during stem cell transplantation. Unfortunately, there are currently no approved drugs in this segment of the US market.
Odevixibat, if successful, will become Albireo’s second drug to be licensed by the FDA. The drug is a bile acid inhibitor targeting PSVC, biliary atresia, and Alagilles syndrome. The company plans to start selling the product as early as the second half of the year, if successful.
Incyte’s Retifanlimab is awaiting an FDA decision by 25/07/2021. Retifanlimab is an anti-PD1 protein that intravenously. The drug is currently part of the treatment of lung cancer and carcinoma of their Merkel cells.
Sol-Gel has announced an FDA review of Twyneo with a target date of August 1, 2021. If approved, Twyneo could be the first FDA-approved acne treatment to contain a fixed-dose combination of benzoyl peroxide and tretinoin.
Amgen’s Sotorasib is currently under review by regulators in the EU, UK, Australia, Canada, and Brazil. Sotorasib is the first KRASG12C inhibitor to be studied in clinical trials, with a total research period of more than two years.
If approved, the opioid agonist drug will be the first drug on the US market to treat hemodialysis pruritus, affecting 40% of patients on treatment.
Belumosudil (KD025) is a selective oral inhibitor of Rho-linked helical kinase 2 (ROCK2), a signaling pathway that modulates the inflammatory response and pro-fibrotic processes. The drug, if successful, will be the first approved drug for Kadmon.
Von Hippel-Lindau disease (VHL) is a rare genetic disorder for which there is currently no systemic treatment. As a result, 70% of patients with VHL face renal cell carcinoma.
Maralixibat is an oral drug with minimal absorption, which has several rare cholestatic liver diseases. Maraliksibat is currently the most promising candidate in the Mirum portfolio.
What does the industry endorsement of Aducanumab mean? And for the FDA?
Alzheimer’s disease gradually deprives the human brain of the most critical functions. According to many estimates, it belongs to conditions that impose the heaviest financial burden on society in developed countries.
Many underestimate its scale and effect, yet by 2050, the incidence may rise to 100 million worldwide. In the United States alone, the number of diagnosed patients in 2020 was 5.8 million. Despite this, there were no approved drugs to treat Alzheimer’s disease on the market until June 7, 2021.
Aducanumab has undoubtedly been a fantastic success for Biogen, which has been developing over the past decade. The company’s shares reacted to the FDA decision with rapid growth, which exceeded 60% in one day.
The market response as a whole is justified: immediately after the FDA’s decision, the company announced the future cost of treatment for patients at $ 56,000 per year. Given the scale of the disease and Biogen’s “monopoly” position, the financial impact for the company at the moment could be enormous.
But many analysts have wondered if the price tag is justified. The fact is that the drug, as we noted above, is very controversial in terms of its medical effect. For the past six months, the FDA has been under tremendous public pressure in the face of 35 million patients diagnosed with dementia, on the one hand, and scientists claiming the drug’s low efficacy, on the other.
Three advisory panel members immediately announced the layoffs following the FDA’s decision, saying the regulator’s decision had lowered its work standards. Last year, the entire advisory committee unanimously opposed the approval of aducanumab.
The last time the regulator faced a similar situation was in 2016 after the approval of the drug Eteplirsen from Sarepta Therapeutics, which targets Duchenne muscular dystrophy. However, several research team members pointed to the unusually close collaboration between Biogen and the FDA. Janet Woodcock, the head of the FDA, receives a significant portion of criticism in such conditions, and her prospects in office remain very dim.
How important is the regulator’s decision, however, for the healthcare industry? On the surface, the answer is critical. Even with pressure on Janet Woodcock, history has seen several examples of companies with breakthrough drugs receiving the green light from the FDA. Moreover, the regulator demonstrates a willingness to work with research results and, if necessary, make certain compromises.
It opens up new perspectives for companies in the sector, which are especially relevant for biotechs and pharmaceuticals operating in segments with pronounced unmet medical needs.
As noted above, spending in the oncology, immunology, and neuralgia segments will dominate the healthcare sector over the next five years. These segments of medicine belong to the categories of unmet medical needs, which signals a further acceleration of research in these areas. Regulatory support badges will only provide additional incentives for young biotech startups and industry giants alike.
Bristol Myers Squibb currently has an extensive portfolio of drugs, which includes more than 30 names. The company’s main products are Eliquis for preventing blood clots and reducing the risk of strokes, Opdivo for treating certain cancers, Orencia for rheumatoid and psoriatic arthritis, Sprycel for treating certain types of leukemia, and Yervoy for treating advanced melanoma.
In March 2021, the FDA approved Idecabtagen Vicleucel for patients with recurrent or refractory multiple myeloma who have already received four or more lines of therapy, including an immunomodulatory agent, a proteasome inhibitor, and an anti-CD38 monoclonal antibody. According to our estimates, Bristol Myers is markedly undervalued, and we view this bond as an attractive investment in the long term. Bristol Myers has a fair value estimate of $ 179.86 billion, or $ 79.94 per share, which implies 20% upside potential from the current price level.
Amgen is an American biotechnology company that researches, develops, and manufactures pharmaceuticals using cell and molecular biology methods. Amgen can be considered a pioneer in the use of living cells for the production of biologics. The creation of the oncological drug filgrastim (Neupogen and its modification Neulasta) played a vital role in forming Amgen as a giant in the industry.
The coronavirus pandemic has had a moderate negative impact on Amgen’s business. In contrast, the growth in new drug sales has mitigated the adverse effects of declining in-person consultations and prescriptions in Western countries. Moreover, Sotorasib noted above has every chance to be added to them.
Accordingly, we have a BUY recommendation for Amgen, with our fair value estimate of $ 285.74 per share, which equates to 19% potential.
Merck & Co is, in our opinion, one of the most undervalued companies in the American healthcare sector. In 2021, Merck could become one of the leaders in the number of approved new drugs (Vericiguat, MK-6482, V114), not counting the new indications for the cancer blockbuster Keytruda. The emergence of the American economy from the pandemic and a balanced business structure (the company completed the Organon spin-off in the spring) will be critical drivers for Merck.
The company operates in the most promising markets for immunology and oncology: Keytruda will retain its exclusive patent until the end of 2028. Merck & Co’s management expects an adjusted EPS of 2021 in the range of $ 6.48 – 6.68, which implies maximum growth within a solid 12.46%. The company’s investment attractiveness by the dividend yield, which in the future NTM will amount to about 3.4%. The upside of the shares, according to our estimates, is about 18%.
Antique “cocktail” REGEN-COV has become a real breakthrough for Regeneron. In 2021 and subsequent years, it will bring the company significant revenue: just from the contract with the US Government in 2021, Regeneron will receive about $ 2.6 billion. So, again, impressive commercial potential and some of them may change the balance of power in certain branches of medicine.
The company spends a significant part of its funds on R&D: in the last three years, R&D expenditures have averaged 35% of revenue. These factors open up considerable potential for the company: currently, according to our estimates, the upside is 15%.
Health Care EU: Health Analytics & AI Market Will Drive Sector Forward
For the European health sector, the second quarter of this year ended even more successfully. The Stoxx 600 Healthcare Index is up 9.94% since March 31, 2021, while the STOXX 600 is up 5.97%.
The pace of informatization in the European biotech, according to all forecasts, can become the main driver of the further growth of the healthcare sector. Mordor Intelligence analysts pay special attention to the segment of medical analytics: in 2021-2026. According to the company, this market will grow with an annual average annual growth rate of about 15%. An increasing number of healthcare providers and businesses seek to integrate clinical analytics into their daily activities to offer preventive care through effective patient data monitoring and personalized approaches.
Clinical analytics is guaranteed to be an essential tool for using real-time medical data (via e-health) to make decisions, predict outcomes and reduce costs by allowing early intervention to prevent potential clinical complications. According to a survey conducted by Deloitte, about 65% of respondents from European healthcare organizations stressed that they have significantly increased the use of electronic analytics and technology during the COVID-19 pandemic. The most commonly used technologies in the EU were electronic health records (EHR), electronic prescriptions, and online consultation.
Respondents also identified three significant challenges to digital transformation: bureaucracy in healthcare, the cost of technology, and finding the right technology.
While data analytics in the EU will be the apparent basis for the digital transformation of healthcare, doctors note that the telemedicine sector in Europe remains the most promising.
Bayer shares are the most interesting on the European market.
Bayer, being one of the oldest companies in the global healthcare sector, in our opinion, has a good chance of growth in quotations. The company invests a significant percentage of its proceeds in R&D and innovative development. Several Bayer products are awaiting FDA and European regulatory approvals. The most promising drugs in oncology, cardiovascular diseases, and women’s health can bring the company more than 3.5 billion euros in profit annually.
The company’s portfolio already contains a decent number of drugs worldwide, which implies a significant degree of business diversification. The company should receive substantial support in the stock market in the context of increasing global demand and prices for crops, in particular corn and soybeans, as the whole Bayer business segment is engaged in the development of crop protection products. In addition, Bayer could be a beneficiary of the pre-pandemic level of the global economy, as the company did not pay much attention to drugs for COVID-19. Bayer shares have a potential of around 38% as of March 2022, according to our estimates.
