Healthcare firms suffer from an uncertain future

Historic legislative reform in the US has been accompanied by widespread investor uncertainty. At the IR Magazine and Bloomberg Healthcare Breakfast Roundtable held at Bloomberg’s offices in New York City on July 30, attendees gathered to voice concerns and swap advice for handling investor relations in the new paradigm.

Uncertainty

• Firms in the healthcare sector are trying to offer more clarity while investors attempt to understand the impact of the legislation on future valuations.
• Many issuers are still at a nascent stage of development in their post-reform investment story.
• Uncertainty is putting investors, and generalists in particular, off healthcare stocks. 
• One attendee compared the current difficulties to a ‘perfect storm’ and predicted that 2011 will see little improvement in terms of clarity. Of the clarity that has been gained in the sector, some has been adverse, commented one analyst.
• Pharmaceutical firms expect to make sizable gains from the legislation in the long term, but this is still not being reflected in valuations; many analysts have been surprised that valuations have not come back as quickly as expected after the passing of the healthcare reform.
• The contribution from the drug industry could be higher than the $80 bn initially expected, reaching upward of $105 bn.
• Some attendees felt investors will be slow to return to healthcare, despite the passing of the reform. Industry experts expect to reap the benefits in 2014.
• Analysts and IROs agreed that the levers in healthcare reform need to be identified by the buy side and sell-side communities.

Predatory M&A

• Increasingly, IR practitioners in the healthcare sector are reporting more short-term, speculative buyers entering their stock.
• Biotech has become an attractive short-term proposition for some investors, with IROs worrying that short-termism is crowding out long-term investments.
• Many financiers predicted a large amount of M&A in the healthcare sector in 2010, due to the sector’s attractive long-term prospects fuelled by demographic pressures. While deals have been relatively thin on the ground, the healthcare sector has been subject to speculative rumors about M&A. This has especially been the case on social media websites.

What analysts need from IR

• Analysts don’t expect IR to comment on every piece of news; a good IRO is one who can frame the relevant issues.
• The best IR teams help analysts understand the issues involved and guide the analyst community on what to look for.
• One tactic is to conduct individual follow-ups after analyst calls to make sure analysts have a proper handle on the issues.
• The investment community is looking beyond analyst recommendations, earnings calls and press releases. It is looking for pipelines, M&A opportunities and successful clinical trials.
• Analysts have started looking for new drivers. ‘As an IRO you must be aware that your community has greater access to more data sets to help analysts do more analysis and due diligence,’ stated one IR practitioner.

The growing information ecosystem

• The information ecosystem is growing thick and fast around healthcare, and the Street is increasingly looking for more information to improve its models. ‘We have an earnings call next week, and one thing we are wrestling with is how to help investors understand our business,’ explained one attendee. ‘For many of our investors, reimbursement is a big issue.’
• The quarterly call is a good time to get another person on board, such as chief medical officers for small medical companies. 

Conclusion
Those in the healthcare sector are struggling to help the investment community understand the potential impact of healthcare reform on their business. Issuers are reporting inaccuracies in analyst notes arising from misinterpretation. Arguably this necessitates closer engagement with the buy side and sell-side communities. The recovery in valuations has not been as swift as some had hoped, and companies are struggling to quantify the effects of reform.

Ultimately, while long-term prospects are good, the short-term valuations are set to remain shaky until further details emerge or until 2014, when the legislation takes effect.