1. UK Healthcare Industry Landscape

The Healthcare sector encapsulates a diverse range of companies engaged in providing medical services, manufacturing drugs, medical equipment and facilitating the provision of healthcare to patients. The industry attracts a lot of Government intervention. Moreover, the UK healthcare system is well managed as the entire population in the UK got covered by the National Health System (NHS). NHS is financed by general taxation and run by the Department of Health. Overall, the various segments of the healthcare industry include Pharmaceuticals & Related Segments, Hospitals, Clinics; Healthcare IT; Laboratories and Testing Services; Healthcare Services and Facilities; Managed care; Medical Devices; Hospital Supplies Manufacturers and Healthcare IT.

The most prominent players of the UK healthcare sector are GlaxoSmithKline and AstraZeneca, followed by foreign companies such as Pfizer, Novartis, Hoffmann–La Roche and Eisai. Recently, Sajid Javid got appointed as the UK secretary of state for health and social care after the resignation of Matt Hancock. UK researchers already had several achievements, right from the discovery of penicillin and the structure of DNA to advancements in neuroscience and medical imaging and developments in stem cells and in vitro fertilization. The future of the already highly productive science base is widely reflected in the commitment to increase Research & Development expenditure to 2.4% of GDP by 2027.

Growth Catalysts in the Healthcare Sector

Risk Exposures to the Healthcare Sector

• Intense Competition: With the rise in demand and new entrants, there is strong competitive rivalry in the market, which puts pricing pressure.
• Stringent Regulations: The strict rules and policies regarding clinical trials, drug approval and authorization of equipment can be a cumbersome task financially. It requires enormous investments in research and developments. Small players can even face a liquidity crunch to pursue growth opportunities.
• Commercialization Risk: Failure to execute commercial strategies regarding affordability, pricing, and availability of products at the right time can impose significant risk. The Covid-19 pandemic has created supply chain disruption, delaying the pipeline, drug approval and timely clinical testing.
• Lack of Skilled Professionals: A widening demand-supply gap of skilled professionals had emerged several headwinds for the public and private health systems, which may also have long-term, detrimental consequences in 2021 and beyond.

SWOT Analysis

Benchmark Index Performance

Based on the last two years performance, the FTSE All-Share Pharmaceuticals & Biotechnology index has outperformed the FTSE 100 index and FTSE 250 index. Furthermore, the FTSE All-Share Pharmaceuticals & Biotechnology index generated a return of about 15.13%; however, the FTSE 100 generated a return of around negative 5.13%, and the FTSE 250 index produced a return of about 14.94%.

Figure 1: Two Year Benchmark Index Performance

 (Analysis done by Kalkine Group)

Healthcare Sector Outlook

The Covid-19 pandemic has transformed the UK’s healthcare industry to a larger extent. Moreover, personalized healthcare, technology, and self-care services have made accelerated progress in 2021. The critical healthcare situation will calm down after the transition period. Furthermore, it is evident that the Covid-19 pandemic created several opportunities for the healthcare sector, which accelerated progress across verticals. The demand for drug stores and pharmacies witnessed a sudden hike amid the pandemic. Moreover, the developments in the clinical trials for the Covid-19 vaccine boosted the sector. In 2021, the growth of the pharma industry shall be supported by the availability of Covid-19 vaccines and their required demand. Currently, global pharmaceutical giants like Pfizer, Moderna, AstraZeneca, Novavax, Sanofi, and Johnson & Johnson are distributing Covid-19 vaccines worldwide. Meanwhile, Britain’s Covid-19 vaccination drive deserves appreciation. According to the recently available data, 44.45 million people had received the first dose of the vaccine, and 32.58 million people had both shots.

2. Investment analysis and stocks under discussion (GNS, OPTI, DPH)

After gaining insights into the Healthcare sector, we would look at the business model of three Healthcare players listed on the London Stock Exchange.

A. Genus PLC (LON: GNS)

(Recommendation: Buy, Potential Upside: 18.24%, Market Capitalization: GBP 3.19 billion)

Genus PLC (LON: GNS) is an FTSE 250 listed animal genetics Company engaged in the sale of added value products for livestock farming and food producers by applying biotechnology.

GNS had paid an interim dividend of 10.3 pence per share on 01 April 2021, while the ex-dividend date was 04 March 2021. The Company is likely to declare the final dividend in September 2021.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 18.24% over the closing price of GBX 4,972.00 (as of 29 June 2021). The next important support level on the technical chart is at GBX 4,272.00.

B. OptiBiotix Health PLC (LON: OPTI)

(Recommendation: Speculative Buy, Potential Upside: 23.45%, Market Capitalization: GBP 47.05 million)

OptiBiotix Health PLC (LON: OPTI) is an FTSE AIM All-Share-listed life science company. It is involved in the development and research of microbiome modulators mainly in the United Kingdom.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 23.45% over the closing price of GBX 51.00 (as on 29 June 2021). The next important support level on the technical chart is at GBX 46.50.

C. Dechra Pharmaceuticals PLC (LON: DPH)

(Recommendation: Expensive, Potential Downside: 23.09%, Market Capitalization: GBP 4.71 billion)

Dechra Pharmaceuticals PLC is a UK-based Company engaged in the development and manufacturing of products for veterinarians. It is a constituent of the FTSE 250 index.

DPH had paid an interim dividend of 11.11 pence per share on 07 April 2021, with an ex-dividend date of 04 March 2021. The Company is likely to pay the final dividend in November 2021.

Valuation Methodology

Our illustrative valuation model suggests that the stock has a downside potential of 23.09% over the closing price of GBX 4,352.00 (as on 29 June 2021).

*All forecasted data and peer information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*The "Buy/Speculative Buy” recommendation is also valid for the current price as covered in the report as on 30 June 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective buy/speculative buy stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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