1. UK Healthcare Market Landscape

The UK has emerged as a world leader in developing, manufacturing, and marketing pharmaceutical and clinical products. Overall, the various segments of 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 market size of UK private healthcare market was valued nearly US$ 11.8 billion in 2017, and it is expected to reach US$ 13.8 billion by 2023, representing a CAGR of around 2.6% between 2017 to 2023. The increase in NHS (National Health Service) waiting list and rise in referrals to the private sector shall act as growth catalysts. The other growth drivers include rising disposal income, greater expectations of quality healthcare, and increasing knowledge of health coverage possibilities.

Key Trends in the Healthcare Sector

• Demographic Factors: Increasing urbanisation, growth in aging population, increasing wealth, and a greater desire for improving the standard of living shall meet the requirement for better healthcare systems and equipment.
• Digitalisation and Technical Breakthrough: The advancements in analytics, digitalisation, artificial intelligence, machine learning and automation are redefining the healthcare industry. The new technologies are improving treatment regimens, enhancing prevention, and facilitating a more accurate diagnosis. As per market data, 38 billion internet-connected devices to be installed in healthcare systems by 2025 globally.
• Predictive and preventive care: The new vision for healthcare market will not merely focusing on affordability and quality but also targeting preventive, predictive, and outcome-based care models.
• Untapped opportunities lying in Gene Editing and Gene Therapies holds the promising potential for the future markets. Several biotech companies are working in the direction of insertion, replacement, deletion of DNA within a gene to treat rare genetic disorders.

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 authorisation of equipment can be a cumbersome task financially. It requires huge investments in research and developments. Small players can even face a liquidity crunch to pursue growth opportunities.
• Commercialisation Risk: Failure to execute commercial strategies regarding affordability, pricing and availability of product 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.

Benchmark Index Performance

Based on the 2-Year performance, the FTSE All Health Care index has generated a positive return of around 13.17% and has outperformed the FTSE 100, FTSE 250, and FTSE All-Share indices with price return of nearly 0.10%, 9.77%, and 3.24%, respectively.

Fig 1: Two Year Benchmark Index Performance

Source: Refinitiv, Thomson Reuters

SWOT Analysis 

Healthcare Sector Outlook

As the global healthcare spending is projected to rise at a CAGR of 5% between 2019 to 2023, it is likely to generate ample opportunities. The rising prevalence of chronic diseases, aging population, technological advancements, and expansion of healthcare systems shall act as growth drivers. 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. Adjacently, global pharmaceutical spending is projected to hit USD 1.5 trillion in 2023, projecting a CAGR of 3% to 6% between 2019 to 2023. At the same time, pricing, patient exclusivity, and regulations are presenting challenges as well as opportunities.

Adjacently, widening demand-supply gap of skilled healthcare professionals is creating huge challenges for private and public healthcare systems. Moreover, NHS can make a difficult entry for small players due to stringent regulations and pricing policy. Nevertheless, Private hospital and clinics in the UK have doubled the revenue over the past five years, as the increasing number of patients are opting for self-fund private hospital treatment. Similarly, there is a growing demand for diagnostic services such as endoscopy, CT scans, and MRI scans, wherein patients are seeking a rapid diagnosis.

Furthermore, it is evident that 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 developing 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 its required demand. Meanwhile, AstraZeneca’s vaccine has already got approval for emergency usage. Some other leading entities are also expected to sell their vaccine soon.

2. Investment analysis and stocks under discussion (AZN, HIK, UDG, OXB)

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

A. AstraZeneca Plc (LON: AZN)

(Recommendation: Buy, Potential Upside: 13.24%, Market Capitalization: GBP 96.88 billion)

AstraZeneca is a UK based biopharmaceutical company engaged in discovery and development of products. The Company is focused on Cardio, Oncology and Respiratory segment. It is listed on the FTSE-100 index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of 13.24% over the closing price of GBX 7,380.00 (as on 02 February 2021).

B. Hikma Pharmaceuticals Plc (LON: HIK)

(Recommendation: Buy, Potential Upside: 23.80%, Market Capitalization: GBP 5.56 billion)

Hikma Pharmaceuticals is the UK-based pharmaceuticals and biotechnology company, engaged in manufacturing, development and marketing of generic medicines. HIK is listed on the FTSE 100 index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of 23.80% over the closing price of GBX 2,413.00 (as on 02 February 2021).                                                                                     

C. UDG Healthcare Plc (LON: UDG)

(Recommendation: Hold, Potential Upside: 8.57%, Market Capitalization: GBP 2.11 billion)

UDG Healthcare is an Ireland based multinational company that provides various services such as advisory, commercial and packaging to the Healthcare industry. The Company had its footprints in over 29 countries. The Company had two business segments: Ashfield & Sharp. It is listed on the FTSE 250 index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of 8.57% over the closing price of GBX 839.00 (as on 02 February 2021).

D. Oxford BioMedica Plc (LON: OXB)

(Recommendation: Hold, Potential Upside: 12.99%, Market Capitalization: GBP 827.02 million)

Oxford BioMedica is a leading UK-based biopharmaceutical company which is engaged in the research, development and bioprocesiing services of gene and cell therapy. The Company is listed on the FTSE-250 index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of 12.99% over the closing price of GBX 1,004.00 (as on 02 February 2021).

*All forecasted data and peer information have been taken from Refinitiv, Thomson Reuters.

*The "Buy" recommendation is also valid for the current price as covered in the report as on 03 February 2021.

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