• Investment Banking
  • Oct 20, 2020

3 Themes Shaping Healthcare at an Inflection Point

As coronavirus drives urgency for innovation in the healthcare sector, investors are watching the race for a vaccine, trends in technology and demand for deal-making.

As the world continues to grapple with COVID-19, companies race to develop vaccines and the impending U.S. presidential election hangs in the balance, the global healthcare industry is experiencing one of its highest-profile moments in recent history.

Financial markets are watching closely, as few other sectors seem to show as many signs of activity for capital raising, consolidation or investment. This presentiment underpinned Morgan Stanley’s 18th annual Global Healthcare Conference held virtually last month, where more than 350 companies and 1,200 investors gathered to learn and discuss key questions, insights and corporate outlooks. “This is one of the most important years for healthcare companies,” says Matthew Strom, Executive Director in Healthcare Investment Banking at Morgan Stanley, who covers healthcare technology companies. “Investors have never been more interested in the sector, and there’s an opportunity for growth that doesn’t exist in other areas right now.”

Some of the most common queries, unsurprisingly, surround COVID-19 vaccine development, timing and distribution. But companies and investors are also wondering how the widespread adoption of virtual clinical trials that involve remote patient monitoring and data collection could spur new healthcare regulations or change the process of drug research at large.

Indeed, the tech acceleration theme, including the rise of telehealth, deep-learning for computational pathology and physician-recommended software as therapeutics, excited many participants. As coronavirus drives urgency for innovation and investor focus on potential winners, as well as greater access to capital, many are also assessing demand for corporate transactions. This includes mergers and acquisitions and initial public offerings—as well as alternative paths to public markets.

Here’s how three key topics could shape the future of the industry.

1. The race for a coronavirus vaccine

The pandemic’s systemic effects on the global economy have many healthcare investors screening companies through a simple filter: Do they offer products or services related to coronavirus? “There’s a bifurcation in public markets for companies that are viewed as providing a COVID-19 solution and those that are not,” says Jason English, Managing Director in Healthcare Investment Banking, who covers healthcare technology companies.

Taking centre stage are the pharmaceutical companies in various phases of clinical trials for a vaccine. While some are using the virus in a weakened or inactivated form, or the virus’s proteins, others are using genetic material to make viral proteins that trigger an immune reaction. Corporates, investors and regulators are all wondering: “Will novel approaches, like RNA and non-replicating vectors, compete with traditional protein-based vaccines for large patient populations?” according to Albert Hwang, Managing Director, Healthcare Investment Banking, who specialises in biotechnology companies.

While multiple vaccines may come to market, questions about efficacy will ensue. What will antibody production vs. T-cell reaction—signs of immune response—yield in vaccine effectiveness? Will speed to market affect efficacy rates, or could the need for early delivery of a vaccine that is only partially-protective prevail?

2. Investing in healthcare technology

As the pandemic’s stay-home environment catapults certain healthcare technologies into the mainstream, investors are assessing what tools may be next for mass adoption. Healthcare tech companies run the gamut. For example, chemical simulation software can help scientists discover new molecular compounds for drug development; instead of medication or devices, physicians can now prescribe a new class of apps, whether as monotherapies or in conjunction with drugs, as therapy to help patients change their behaviours to avoid heart attacks, treat insomnia or alleviate chronic lower back pain.

Many businesses that span tech and healthcare are also harnessing big data and artificial intelligence. Examples include platforms that help payers determine the value of treatments by identifying trends in information from claims, electronic health records, registries or clinical trials; or companies that make wearable biosensing technologies that use cloud-based data analytics and machine learning to define the way conditions are clinically diagnosed.

“People are recognising that digital tools are equivalent to, or better than, ordering a lab test, renewing your prescription, or getting in-person mental-health advice,” Strom says. “All of that has been in existence for quite a while, but the use of it is absolutely exploding during this time.”

As healthcare-tech adoption advances, investors may also wonder whether blue-chip tech companies will try to claim bigger slices of the market, Strom says, whether through larger investments or more acquisitions of digital health startups.

3. Signs of life in healthcare deals

Demand for healthcare corporate transactions has climbed since initial market volatility at the onset of the pandemic. For healthcare mergers and acquisitions, “We’re basically back at pre-COVID levels of activity,” says Tedd Smith, Managing Director, Mergers and Acquisitions, who focuses on healthcare. “If you told me that would be the case back in April or May, I would have been shocked.”

While deal volumes may fall on a dollar basis in 2020 compared to 2019, the number of transactions may climb, according to Smith. “Putting aside the pandemic, our expectation heading into the election year was that you would see fewer mega-cap deals, which really drove dollar volumes in 2019. The market has proven to be incredibly resilient over the past several months. With healthcare accounting for a bit more than 20% of total volumes, it’s been a real bright spot for us,” Smith says.  

The appetite for transactions transcends M&A. Some companies have opted for virtual IPOs, while financial sponsors have expressed growing interest in special-purpose acquisition companies (SPACs), an alternative to going public that involves raising capital from public investors to purchase a private company and bring it public.

“The perception of SPACs has changed quite meaningfully over the past few years,” according to Ari Terry, Managing Director, Healthcare Investment Banking, who also specialises in M&A. “It used to be a method of last resort for companies, but fast forward to today and there are more reputable sponsors and individuals starting SPACs because of high-profile success stories.” He estimates the current crop of more than 100 SPACs has about US$40 billion in dry powder.

For more on the themes shaping healthcare, speak to your Morgan Stanley financial adviser or representative. Plus, more Ideas from Morgan Stanley's thought leaders.