1. UK Healthcare Sector Landscape

The healthcare industry provide a variety of services to aid healthcare needs. The key industries within the healthcare sector can be broadly classified as Health care services and facilities; Medical devices, imaging, equipment, and hospital supplies manufacturers; Medical insurance, medical services and managed care; Biotechnology, pharmaceuticals & Related Segments (including medical cannabis); Hospitals, clinics, laboratories and testing services, and Healthcare IT.

Amid sluggish global economic outlook and rising global trade tensions, the market size for the worldwide healthcare market is projected to top US$2 trillion mark in 2020 (according to the report from Research and Markets). Adjacently, as per the report from the IQVIA Institute for Human Data Science, global pharmaceutical spending is projected to hit USD 1.5 trillion in 2023, projecting a CAGR of 3% to 6% between 2019 to 2023.

The UK spends a significant portion on the health system as it was close to 10.3% of the GDP in 2019 and it was placed at 11^th position based on health spending as percent of GDP as per the OECD data. In the same year, the US was at the top in the health expenditure as its health spending as percent of total GDP, was around 16.9%. In 2019, the UK ranked 17^th in terms of the per capita spending on health, which stood at close to USD 4,653. The US and Switzerland held the top two places with the per capita health spending of USD 11,071 and USD 7,732, respectively.

The per capita health spending of the UK grew at a CAGR of around 3.4% between 2010 and 2019. Approximately 79.4% of the total expenditure on health in the UK was from public sources, and it was well above the OECD average of 71.2%. The UK had nearly 2.95 doctors per 1,000 patients in 2019. 

The UK has a risk-sharing healthcare system where everyone pays in the form of tax for the well being of fellow citizens. The government takes care of the health of its people, and it pays for the treatment. National Health Service (NHS) is a government-run organization, and it is also referred to as socialized medicine by some people. Only some services require the patients to pay out of their pockets that include dental, eye care and certain prescription drugs.

Private Healthcare sector is playing a critical role in meeting the UK's increasing healthcare needs. The private sector is growing as the government is promoting it, and it is an adjunct to the National Health Service (NHS). The private demand is edging up due to the long waiting list at the National Health Service (NHS). As per pharmiweb, the UK's Private Healthcare sector market is expected to grow at a CAGR of around 2.6% between 2017 and 2023, and it would be valued around USD 13.8 billion. The primary source of payment to the private hospitals for medical treatment is health insurance, National Health Service (NHS) and self-pay.

As per the Decision Market Report, the UK private healthcare was valued around USD 11.8 billion in 2018, and the market size is projected to reach around USD 13.8 billion by 2025, growing with a compounding annual growth rate of 2.6 per cent.

Fig 8: Medicine Spending in 2020 by Geography, Product Type and Disease Area

(Source: IMS Health, Market Prognosis)

Impact of Covid-19 on the Healthcare Sector

On 12 March 2020, the WHO declared covid-19 as a pandemic. The Healthcare sector has been more resilient to the impact of covid-19 outbreak. Some of the sub-sectors in the healthcare industry have suffered, while some have truly benefitted. The pharmaceutical businesses that were engaged in the covid-19 related products had a scintillating performance.

However, the sales of pharmaceutical companies that were not directly involved in the development of the covid-19 product were impacted as the medical representatives were not able to interact with the doctors in the clinics. Clinical studies were affected as the trials and research were deferred due to the health crisis, and there was disruption in the pharmaceutical supply chain as the generic drugs that are manufactured in China and India were severely impacted.

During the pandemic, the National Health Service (NHS) asked the hospitals to cancel or postpone the elective surgeries by 12-weeks, and approximately 516,000 surgeries were cancelled. The National Health Service (NHS) and the Private Healthcare sector worked in collaboration to fight against the pandemic.

Sub-sector classification of Healthcare Sector

(Source: Kalkine Group)

• Medical devices and Equipment: It includes apparatus used in the test labs to high tech diagnostic and therapeutic instruments. The mounting challenges related to dealing with epidemics and chronic diseases have led to the development of devices for detection and cure of the problem with high precision. The UK government recently announced that UK medical devices that were run under the EU system would be governed by the Medicines and Healthcare products Regulatory Agency (MHRA) starting from 1^st January 2021.

• Pharmaceutical and Drugs: It is one of the top sectors that contributes to the nation's wealth, and it includes vaccines, drugs, and consumer healthcare & nutritional products. AstraZeneca (AZN) and GlaxoSmithKline (GSK) are UK based, and they are among the world's top pharmaceutical companies. As per the Globalambition report, the Pharmaceutical market would trend upwards at a CAGR of around 3.6 percent between 2018 and 2023 to reach £25 billion.

• Healthtech: The digital transformation of the healthcare system is the key priority of the government as it brings efficiency and productivity. NHSX has been set up by the government with an objective of the digital transformation of health and social care. Technology is used for the predictive analysis to determine any future health issues based on the genetic or past medical history. It is used in surgeries and for maintaining the patient's data. Healthtech is expanding its foot, and it is driving the betterment of the citizens.

• Healthcare Services: This covers home care, adult specialist care, childcare, mental health, and occupational health. The UK has an age profile that covers a large portion of the elderly population, and thus home care and specialist care are among the front line services that are funded by the government. The public and private funded homecare market in the UK is growing. As per Fortune Business Insights report, the UK Healthcare market is expected to grow at CAGR of around 6.35 percent between 2018 and 2026. The market size of Home Healthcare was USD 1,192.6 million in 2018, which is expected to grow to USD 1,951.7 million by 2026.

• Health Insurance: The gap between personal income and healthcare expenditure is continuously rising, and it is unlikely to blur. Health insurance provides a way to hedge the healthcare-related expense risk. The National Health Service (NHS) covers the majority of the healthcare provision but still the population has significant exposure to the private hospitals, and thus health insurance provides a source of funding. As per the Modor Intelligence report, the UK's health and medical insurance market would grow at a CAGR of close to 3.2 percent between 2019 and 2024.

Futuristic elements of the Healthcare Sector

The constant development in the field of vaccines, drugs and medical equipment would

continue, but there are a few fields that we believe would be in the limelight.

• Rehabilitation and Prosthetic Robots: These are an intelligent substitute for the body parts that integrate advanced mechatronics, intelligent sensing, and high order of control. It has mechanical tools that mimic the same as human muscles that can sense the neural signals and provide a natural response. It offers more independence and reduces the risk of accidents.

• Digital therapeutics: It is the digital software program that is powered by Artificial Intelligence, and it is used for the treatment of mental disorders or control of health conditions. It is a method of personalized care, and it reduces the dependency on the pharmacy. It delivers evidence-based therapy that works in support of the current medical treatment. Gamification is one domain of it that is used for interaction with patients to determine their behavioural conditions.

• Cognitive Devices: It uses the internet of things (IoT), and it has sensors that provide high-quality healthcare services. These devices monitor the fitness, and it can be used in the wearable form, or it can be implanted. An example is an e-tattoo that has sensors, which monitors the heart of patients using electrocardiography (ECG) and seismocardiography (SCG).

• Online Consultation: It is attracting higher attention in the current scenario when an in-person meeting is challenging. The video consultation reduces the waiting time and post-lockdown the National Health Service (NHS) has promoted online consultation with general practitioners (GP). 

Growth Catalysts

• The rapid growth in the ageing population will increase the need for drug requirement.
• Moreover, increasing urbanization will lead to greater wealth and requirement for a better healthcare system and equipment.
• There are over 382 million people with diabetes globally.
• UK healthcare spending has been growing over the years.
• The global medical technology industry sales are expected to increase from US$363.8 billion in 2013 to US$513.5 billion in 2020.
• Globally, life expectancy is projected to increase from 73.5 years in 2018 to 74.4 in 2022. 

Key Risks

• Inadequate Investments: The healthcare system requires a massive amount of investment and government support to take care of significant hospital deficit, maintenance of backlog and workforce shortages. Suppose the cost of providing healthcare outstrips the funding, and then it could be a considerable hazard.

• Quality & Access to Care: Increasing numbers of people are unable to access social care. The right number of patient beds, the latest medical instruments, doctors, and support staff are essential and lacking on any of these fronts could be disastrous.

• Staffing Shortage: Hiring and retaining quality nursing and healthcare staff is very important to perform critical surgery. The limited resources would cause a delay in the treatment. Large numbers of general practitioners (GP) are retiring that need to be replaced.

• Development of Drugs & Vaccines: The drugs and medicines provide a potential benefit to some degree, but no medication is perfectly safe. The vaccines developed to treat diseases and flues could make the patient vulnerable to other hormone imbalances.

Healthcare Sector Outlook

As per the publication from the Research and Markets, the UK’s private hospital and clinics has doubled the revenue over the past five years, as the increasing number of patients are opting for self-fund private hospital treatment. Moreover, the restrictions on access to NHS funding for cancer drugs has fueled the growth in self-pay oncology. Similarly, there is a growing demand for diagnostic services such as endoscopy, CT scans, and MRI scans, wherein patients are seeking rapid diagnosis than they can obtain under the NHS. It has been observed that one in four private patients are now self-funding their treatment instead of using private medical insurance.

Meanwhile, the Global healthcare expenditure is projected to reach USD1.5 trillion by 2023, which was valued at USD 1.2 trillion in 2018. This upward trend is primarily driven by the incremental rate of ageing population and life expectancy. By 2050, there will be around 2 billion people above 60 years of age, while life expectancy is forecasted to increase by 4 years in 2040. The Specialty drugs (especially oncology and rare diseases) is expected to represent two-thirds of all product launches over the next 5 years.

The above-mentioned global trends are occurring at a time when the cost of developing a drug is rising, and the market (comprising both biotech and pharmaceutical firms) is moving towards specialty therapies. Moreover, there is a shift in product mix from conventional primary care drugs to orphan drugs, which are more expensive and complicated. Furthermore, as per the report from Research and Markets, the clinical trial supplies market is projected to grow by CAGR ~7% (from 2019 to 2027) and reach ~US$3,298.91 million by 2027, which was valued at ~US$1,867.44 million in 2019.

The World Economic Forum projected that non-communicable diseases (NCDs) could incur the cost of ~USD 47 trillion to the global economy by 2030 as the number of NCDs death had risen from 31 million in 2000 to 41 million people in 2016. Moreover, increasing urbanization will also lead to greater wealth and better healthcare requirement. Further, as per Strategy Analytics, it is estimated to have ~38 billion internet-connected devices to be installed by 2025 globally. In 2019, Global pharmaceutical sales were also increased by 6% to USD 1,033 billion (as compared to USD 975 billion in 2018).

As per the recent publication from the Report Linker, the global pharmaceutical spending is projected to hit USD 1.57 trillion by 2023, wherein North America would retain the leading position with a market share of around 45%. At the same time, pricing, patient exclusivity, and regulations are presenting challenges as well as opportunities.

Healthcare is an evolving space, yet the complexity hangs around it. The fundamental demand of the sector would continue to climb with the rise in research & development and new launches. The impact of covid-19 mayhem has made the government more vigilant to make investments in strengthening the health system.

The UK health system would have a structure where the bottom layer would be self-care. The patients would look after themselves with the use of digital solutions that include chatbot, telehealth and applications that help in the mental wellbeing. The telehealth market in the UK is expected to surge at a CAGR of ~10.4% between 2020 to 2025. The rise in 4G and 5G technology and increasing acceptance of telemedicine will create a significant opportunity for the companies.

Fig 9: Global Telehealth Market Size (USD Billion)

The second layer would consist of pharmacists and primary care doctors. The top layer would be for the treatment of acute illness and life-threatening diseases through technologies where precision medicine, genomics and artificial intelligence would play a significant role. However, the primary goal of the government is to develop a vaccine or find a way through which the impact of the covid-19 pandemic could be mitigated.

2. Investment theme and stocks under discussion (UDG, SN., OXB and IDH)

After understanding the recent trends in the sector, let ’s now look at the four players from the industry those are listed on the London Stock Exchange. To assess the companies, the stocks are evaluated based on relative Enterprise Value to Sales multiple

1. LSE: UDG (UDG Healthcare)

(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: GBP: 1.91 Billion)

UDG Healthcare plc (LON: UDG) is a FTSE 250 multinational healthcare Company that provides services related to advisory, commercial, clinical, communications, and packaging services and is based in Dublin, U.K. The Company operates through two divisions: Ashfield and Sharp.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~28% over the closing price of GBX763.5 on 28 September 2020.

2. LSE: SN. (Smith & Nephew)  

(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: GBP: 13 Billion)

Smith & Nephew Plc (LON: SN.) is a British multinational medical technology company. The Company operates through three global franchises, namely Advanced Wound Management, Orthopedics and Sports Medicine & ENT (Ear, Nose and Throat). The Group is a part of the FTSE 100 index and employs close to 18,030 workers and has manufacturing facilities in several countries.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~18% over the closing price of GBX 1,480 on 28 September 2020.

3. LSE: OXB (Oxford biomedica)

(Recommendation: Hold, Potential Upside: Low Double Digit, Mcap: GBP: 668 Million)

Oxford medica (LON: OXB) is a FTSE 250 listed gene and cell therapy Company specializing in research, development, and production of gene-based medicines. The Company employs over 550 people across its several locations in the UK.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~13% over the closing price of GBX 810 on 28 September 2020.

4. LSE: IDH (Immunodiagnostic)

(Recommendation: Spec. Buy, Potential Upside: Double Digit, Mcap: GBP: 64.1 Million)

Immunodiagnostic Systems Holdings PLC (LON: IDH) is United Kingdom headquartered FTSE AIM All-Share listed Medical Equipment Company, which supports clinical laboratory market by developing and selling in-vitro diagnostics tests (IVD are diagnostic tests which are performed based on blood and serum).

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~39% over the closing price of GBX 230 on 28 September 2020.

Note: All the recommendations and the calculations are based on the closing price on 28 September 2020. The financial information has been retrieved from the respective company’s website and Refinitiv (Thomson Reuters).

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