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The health care sector represents approximately 18% of US GDP, and will total approximately USD 4bn in 2020 of total domestic spending. (UBS)

Healthcare

Outlook on the US health care

sector
17 September 2020, 7:24 pm CEST, written by UBS Editorial Team

The Chief Investment Office (CIO) believes the health care sector offers attractive long-term growth and in the
aggregate trades at a substantial valuation discount to the broader equity market. As a result, CIO rates the
health care sector moderately preferred.

A new report from Eric Potoker, Health Care Sector Strategist Americas, focuses predominantly on larger capitalization
stocks, as well as a handful of mid-sized companies. His overview examines the sector from a top-down perspective,
including the key macroeconomic and policy drivers. Potoker also details CIO’s preferences among 24 companies within
the health care sector.
Over the next 12 months, CIO believes the health care sector should outperform the broader equity market. In the
near term, however, perceived risks to health care policy and the upcoming US election could limit health care sector
performance, and thus the sector outperformance will likely occur during 2021 once there is clarity on the election and
potential health care policy changes. That being said, downside risk for the sector appears limited, and the sector should
offer good protection if markets experience a bout of volatility.
The health care sector represents approximately 18% of US GDP, and will total approximately USD 4bn in 2020 of
total domestic spending. The sector spans multiple industries, including pharmaceuticals, biotechnology, medical devices,
life sciences tools, and health care services/providers. While all of these industries are intertwined from an operating
perspective (they are each other’s customers, suppliers and service providers), they are different from an investment
perspective.
"While we believe the pharmaceutical and biotechnology industries have significant potential for outperformance over
the next 12 months, we think near term upside is limited because of election and related health policy uncertainty," says
Potoker. "We also note that pharmaceutical and biotech valuations are currently at historically low levels, which we think
have the potential to correct upward if health policy uncertainty is reduced after the upcoming US election and into 2021."
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Health care equipment and supplies should continue to outperform near term going into the election as this sector is
mostly insulated from potential policy changes. Longer term, health care equipment and supply companies should retain
their attractive growth profiles and thus their premium valuations relative to the broader market.

The life sciences tools and services (LST) industry has strong secular growth drivers and will likely benefit from continued
government and industry spending on medical research. LST companies are largely immune from the health policy issues
currently being debated in Washington, and research funding is widely supported by both political parties.

The health care providers & services industry is quite diverse, points out Potoker. "We are focusing on the managed
care companies (MCOs) that provide health insurance to employers, governments and individuals. The long-term growth
outlook for MCOs is quite attractive, in our view, and valuations relative to the S&P 500 are near multi-decade lows. That
very appealing backdrop is tempered near term, however, by the upcoming US election and related policy uncertainty."

Given these long-term demand drivers, the health care sector should continue to see significant growth over the next
decade. The Center of Medicare and Medicaid Services (CMS) projects that health care expenditures will increase 5.4%
annually through 2028.

The underlying demand dynamics should drive significant and sustainable long-term profit growth in health care, making
the sector appealing for long-term investors. This is consistent with the sector’s long-term track record. Over the last 25
years, earnings per share for the sector have increased nearly 10% annually compared to 6.6% annual growth for the
S&P 500. The sector also produces much more consistent annual growth relative to the broader market, which by itself
should drive a higher valuation.

Reach out to your FA for the new Health care sector outlook and equity preferences report, published 17 September, 2020.

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