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Jefferies: Investors bullish on healthcare stocks, expect heightened M&A in 2019

Investors are seeing higher exposure to healthcare stocks and anticipate the continued acceleration of M&A activity in the sector in 2019, according to the inaugural Healthcare Temperature Check survey by investment banking company Jefferies.

Jefferies' report is based on views and sentiment from nearly 500 senior leaders within the Healthcare sector, from major investors to CEOs.

About 93% of institutional and private equity investors surveyed by Jefferies expect to maintain or raise their allocation to healthcare stocks next year, despite heightened volatility across markets.

The wave of M&A activity in the healthcare sector is expected to continue into 2019, with over 80% of the nearly 500 survey respondents anticipating deal-making to be at a higher or the same level. Fueled by consolidation, corporate and private equity investors are likely to be the most active movers of M&A in the healthcare sector.

In the third quarter of 2018, M&A activity in the healthcare sector was largely driven by acquisitions of healthcare equipment companies. Medical cannabis companies were also in the dealmaking spotlight, reaching an all-time high during the three-month period.

IPOs will take only a small portion of all transaction activities in the healthcare industry in 2019, according to survey respondents. By the end of the third quarter of 2018, the global healthcare sector has fetched over $19 billion in proceeds from flotations — the highest amount since 2014 — data compiled by S&P Global Market Intelligence showed.

Small- and mid-cap biotechnology companies will likely emerge as the best performers in the healthcare sector, according to 37% of the respondents, with large-cap biopharma companies and healthcare service providers seeing limited appetite from investors.

Hazards in healthcare

Investors see regulatory pressure and political uncertainty as the greatest risks for the healthcare industry in 2019. About 40% of respondents consider pricing pressure from regulatory bodies and payors as a risk for the healthcare industry, and a similar percentage of investors consider political and policy uncertainty to be a risk.

In the U.S., the cost of medicines are expected to continue increasing, but at a muted pace. Healthcare investors are not worried about the probability of drug pricing reform before the next presidential election in 2020.

A recent review of the National Average Drug Acquisition Cost survey showed that certain generic and brand medicines have seen triple-digit price hikes in the U.S. since the start of the third quarter of 2018. Pharmaceutical companies have been under fire from the Trump administration for the high costs of drugs, despite promises to curb price increases.

Meanwhile, 46% of investors believe that the U.K.'s exit from the EU, or so-called Brexit, in March 2019 would impact the healthcare sector negatively. In September, the European Medicines Agency predicted that 39 drugs are at risk of a post-Brexit supply disruption in the U.K., down from 108 estimated in July.

According to the Jefferies survey, only 7% of respondents view lack of innovation as a major risk. Investors are banking on targeted therapies and gene therapy to make a real difference in terms of innovation.