The Flourishing Healthcare Sector – Opportunities across New Zealand

New Zealand possesses internationally recognised strengths with regards to the health research. Considering these strengths, the country has an ability to contribute to international scientific endeavour, address local problems as well as make the best use of knowledge generated offshore. The capacity that New Zealand needs to generate innovative ideas, tap into the global science and effectively translate research findings to policy and practice in the health, disability, social and science sectors is backed by the dedicated investment towards health research. History has shown the developing importance for healthcare space - Budget 2016 witnessed largest-ever increase in the funding towards health research in New Zealand.

Healthcare has emerged as one of the largest sectors in New Zealand in terms of employment and revenue. The sector is comprising hospitals, medical devices, clinical trials, medical tourism, medical equipment and health insurance. There are around 40 public hospitals and many private hospitals around New Zealand.

The healthcare and social support services sector employs one in 11 workers, or around 200,000 full-time equivalents (FTEs).

In a nutshell:

• As per International Trade Administration, approximately 85% of NZ’s healthcare is government-funded.
• Quality of healthcare is high, and it is heavily subsidized to all New Zealanders. NZ’s largest source of healthcare products is the US
• Healthcare sector of NZ is receptive to the US technologies and the sector is constantly seeking new solutions
• Vision of the government for New Zealand revolves around having world-leading health research and innovation system which is founded on excellent research and improves health and wellbeing of the people of New Zealand. Set of guiding principles, strategic priorities along with the immediate actions would be helping to achieve the vision by 2027.

S&P/NZX All Healthcare Sector v/s S&P/NZX50

The global financial markets are going through a very tough time as a result of COVID-19 outbreak. Several fiscal and monetary packages have been rolled out to combat the impact of this deadly disease. While the impact has been felt across the sectors, there are some sectors which have managed to limit their downtrend. S&P/NZX50 fell by 10.77% while S&P/NZX All Health Care have outperformed the broader index as it fell marginally by 2.49% in the span of three months.

As on April 16, 2020, S&P/NZX50 has a market capitalisation of around $243.84 billion out of which NZ$29.92 billion is made up by S&P/NZX All Healthcare Index.

Performance (Source: Thomson Reuters)

Overview of Demand and Barriers

The aging population of NZ influences public healthcare expenditure plans and the people expect access to the advanced equipment to manage chronic diseases. Notably, these diseases account for approximately 80% of the healthcare use. New innovative technologies are crucial to meet the objective. The US companies which are specializing in the healthcare products possess a strong reputation in NZ on the basis of performance, cost and reliability.

NZ happens to be an open market and there are few (if any) barriers to the US companies.

The country’s health care system is strong, and the strengths include:

• a publicly funded, universal health system with a committed and highly trained workforce
• health services with a strong focus on primary care and a widely supported focus on wellness
• local decision-makers in district health boards (DHBs) who are well positioned to respond to community needs and integrate services
• a growing best practice evidence base developed through research

The contribution of healthcare and social support services sector in the growth of GDP has been stronger than employment growth, indicating some productivity gains.

By 2014, the sector accounted for 6.6% of total GDP, up from 5.6% in 2000. At a sub-sector level, the strongest productivity gains have been in hospitals, up 21% in the 14 years to 2014, followed by senior care services, which supports the view earlier that senior care services are becoming more efficient as they scale up.

National Health Expenditure Projections: What Lies Ahead?

As per Centers for Medicare & Medicaid Services, National health spending is anticipated to witness a growth at average annual rate of 5.4% for 2019-28 and, by 2028, it could touch $6.2 trillion mark. Since national health expenditures might grow 1.1 percentage points faster than the gross domestic product per year on an average over the time span of 2019–28, health share of the economy could rise from 17.7% in 2018 to 19.7% in 2028.

Let us now discuss the key trends:

• In 2020, growth in the national health spending has been projected to accelerate to 5.2%, primarily on the back of faster projected growth in the prices for personal health care.
• Between 2021-23, growth in national health spending is anticipated to increase at an average rate of 5.4% as compared to 5.2% expected for 2020. This acceleration is mainly supported by the rising projected personal health care inflation, averaging 2.4% for the period.
• Finally, between 2024-28, the growth in national health spending is projected to average 5.6%, which is slightly faster when compared to the rate projected for the time span between 2021-23.

Structure of Health and Disability Sector in NZ

Health and disability services in New Zealand are delivered by the complex network of organisations and people. The Minister of Health (along with Cabinet and government) develops policy for health and disability sector and also provides leadership.

Working of Health Sector in NZ (Source: Ministry of Health)

The Ministry of Health has range of roles in the system apart from being the principal advisor and support to Minister. It finances a range of national services, including disability support and public health services, and has numerous regulatory functions. Notably, accident services are financed by Accident Compensation Corporation (or ACC).

A Glimpse of Funding Structure

The health and disability system in New Zealand is primarily funded from general taxation. The financing of health system is mainly backed by Vote Health, which totalled just more than $16.142 billion in 2016/17. However, other significant sources of financing consist the Accident Compensation Corporation, other government agencies, local government, and private sources like insurance and out-of-pocket payments.

Source: Ministry of Health

The Ministry of Health allocates over three-quarters of public funds it manages through Vote Health to DHBs (or District Health Boards), who utilise this financing to plan, purchase and provide health services, including the public hospitals and majority of public health services, within their areas. The government gets money for the health system with the help of taxes, ACC levies and premiums. Every year, government decides how much of the public funds would be spent towards healthcare. This is what is termed as Vote: Health. As per The Treasury, Vote Health ($19,871 million in 2019/20) happens to be a large public investment towards wellbeing of the people of NZ and their families.

How Tech Has Been Revolutionising Health Systems in NZ

The technology world has been advancing rapidly and it is affecting many aspects of the day-to-day lives like the way we shop, bank and travel. As a matter of fact, health services are being transformed with the help of emerging technologies.

• Technology is being incorporated in the health systems. According to Ministry of Health, New Zealand, robots and other automated systems have been conducting repetitive and predictable processes and advanced analytics are giving new insights into the complex health problems.
• Research breakthroughs in the human science are actually making ‘personalised medicine’ a reality.
• Digitally capable and enabled workforce has been embracing utilisation of technology that impacts positively. Technology has the capability to remove geographical as well as social boundaries.
• Digital Health Strategic Framework helps in guiding the use of digital technologies and data in order to support a strong and equitable public health and disability system.

Digital Health Ecosystem (Source: Ministry of Health)

The strategic framework consists of aspirational goals and enabling priorities, guidelines and resources that would be evolving over the span of time in response to changing digital world in which the people of New Zealand live in.

Opportunities for Robotics in Healthcare

There are significant opportunities for robotics in healthcare domain which could help the broader healthcare sector in NZ to witness significant growth moving forward.

• Robotic services could be in places where the healthcare workforce can’t be present, and these services possess the ability for the tasks which are required to be completed 24*7.
• Robotics allow automation of physical and repetitive tasks. This is useful so that health workforce could focus more towards the patient’s care and wellbeing.
• Robotics could be tailored to the need of the person easily and its adoption could improve overall productivity of health system.

Some of the companies in NZ have been using robotics like Auckland’s Mercy Ascot has been utilising Robotic Process Automation to process all ACC invoicing as well as receipting for Mercy Radiology. From the past few years, Carterton Pharmacy is utilising dispensing robots to help with managing the medications in Age-Related residential care facilities and in the community for customers benefiting from this sort of service.

Assessing Contribution of Biotechnology in Healthcare

BiotechNZ has been supporting organisations in order to find out the state and future opportunities for biotechnology to contribute towards NZ’s economic growth. The Executive Director of BiotechNZ named Dr Zahra Champion stated that the focus is towards raising the profile of biotech in NZ and globally, so that the country can be seen not just a tourist destination or known for primary produce, but also for the cutting-edge biotech developments.

• Biotechnology has been playing a crucial role for NZ and, in healthcare, BiotechNZ is discovering new drugs through a variety of means including, testing molecular compounds to find possible beneficial effects against any of the large number of diseases or using the existing treatments that have unanticipated effects.
• Arrival of local medicinal cannabis industry is actually good news for NZ and the country’s biotech sector would be playing a critical innovation role in its success.
• BiotechNZ is taking a major lead to make the most of the massive worldwide movement to ensure that the NZ companies and organisations understand the extraordinary potential of both the plant as well as this fast-growing sector.
• Worldwide global medicinal cannabis market would continue to expand and, by 2025, medicinal cannabis is expected to touch US$55 billion global industry. For NZ, this could result in hundreds of millions of dollars in the form of extra export earnings.

The strength of NZ’s medical science, R&D, and biotech ecosystems give perfect base from which to grow the sector. The successful medical cannabis production would need to leverage medical and technical knowhow including biotechnology as well as latest digital production processes.

Aged Care Business: How Overall Occupancy Rate Has Trended?

There are four types of full-time residential care and these can be classified as rest homes, long-stay hospitals, dementia units and psycho-geriatric units. The New Zealand Aged Care Association (or NZACA) has released aged residential care occupancy for the quarter ended December 31, 2019. Following were the main highlights:

• National occupancy rate, as measured by data in TAS Quarterly Bed Survey, at December 31, 2019 stood at 86.4%, which reflects a fall from 87.2% in September 2019 and happens to be the lowest occupancy rate which has been recorded since March 2017.
• Fall in occupancy rate was partly due to the decline in residents since September – these were down by 103 to 34,192 (implying 0.3% fall).
• Larger contribution to fall in the occupancy rate reflects net 223 increase in beds, to 39,568 (which implies 0.6% increase).

Overall Occupancy Rate (Source: NZACA)

Demand in Aged Care: What Drives It?

The population of New Zealand, like any other developed nation, is ageing. The number of people aged over 65 is expected to be double in the next 25 years.

• Advances in healthcare that has enabled people to live longer. However, mental healthcare advances have not been as great. The health costs per person have spiralled.
• Increasing number of population with dementia means huge rise in rest home and dementia care bed.
• At the national level, the main concerns are the sustainability of taxpayers-funded superannuation, and the increased costs of providing health services for older people.
• At the local level, there are issues such as health related, housing and accommodation, and provision for aged-care, transport and community support services to be addressed.

Can NZ’s Healthcare Sector Stay Afloat Amidst COVID-19 Pandemic?

As the investors are aware, the COVID-19 outbreak has been devastating the global financial markets and it has actually weighed over the performances of several sectors. In NZ, some of the sectors which have witnessed a hit include tourism and hospitality.

However, while New Zealanders are still on their toes as to what could be done amidst COVID-19 fears, healthcare sector in the country can be one of the sectors which could provide some hope. In order to combat COVID-19 impact on the economy, the government of New Zealand has announced a spending package of NZ$12.1 billion, equivalent to 4% of GDP. The package is one of the largest on the per capita basis. The stimulus includes bolstering of healthcare sector.

As COVID-19 positive cases mount, the demand for ventilators and other equipment and aged care and retirement villages has surged across the world providing for great opportunities to healthcare sectors to capitalize on. The government of New Zealand has placed aged care centres and retirement villages under essential service and, thus, healthcare companies dealing in these products will remain operational.

What are the measures adopted by NZ government to withstand this global pandemic? Let us have a look!

• Health Research Council (or HRC) and Ministry of Health recently made an announcement about $3 million rapid research response fund.
• Fund has its focus towards supporting range of research projects which address NZ’s evidence needs with regards to COVID-19.
• Recent response package of $12.1 billion consists initial $500 million boost for health to combat the impact of COVID-19 pandemic.
• Cabinet unlocked $235 million of new fund in order to strengthen health capacity
• Placing of over $40 million towards public health having strong emphasis towards contact tracing
• Investment of $50 million towards primary care, which includes funding for Community Based Assessment Centres, equipment and logistics.
• $20 million towards improving the capacity of general practice as well as community health providers to utilise technology.
• Finally, $20 million for more Healthline capacity

The above bunch of deployments could significantly strengthen NZ’s ability to contain COVID-19. Moving forward, these measures together are likely to bear fruit.

Growth Drivers and Opportunities for Healthcare Sector in New Zealand

The health system in NZ is strong and is connected to the changing world. Since people move around the world, technology markets are becoming global and internet spreads knowledge as well as cultural practices, NZ is connected with the rest of the world even though it is geographically distant from it. There are ample of opportunities for the NZ healthcare which could help the broader sector moving forward. Let’s have a glimpse:

• Health sector is expected to benefit from the technological advancements and related infrastructure like broadband
• Cutting-edge biotech developments could also help in growth of healthcare sector and strength of NZ’s medical science, R&D, and biotech ecosystems could act as the base
• Commitment to ensure that primary health care is affordable for the people of New Zealand
• Increased investment by the government towards health infrastructure. These investments can be used for upgrading the current facilities and deploy towards new facilities.
• With the increase in competition, businesses are looking to explore for the latest dynamics and trends which will have positive impact on their businesses.
• New Zealand also offers vast opportunities in R&D as well as medical tourism. The Government expects the health system to continue to focus on delivering high quality health services.
• In 2018, the country infused $750 million into capital projects in health – the biggest capital investment in health for a decade. The 2019 Budget includes two years of capital funding for health: $850 million for 2019/20 and a further $850 million for 2020/21. Over the two years, at least $200 million of the funds will be set aside for investment in capital projects in mental health and addiction.
• Initiatives could utilise technology to deliver better health outcomes for the people of NZ which include patient portals, eMedicines and Telehealth. The following image provides an idea of the uptake in the patient portal:

Patient Portal (Source: Ministry of Health)

Let’s have a look at the leading companies listed on NZX in healthcare sector

Comparative Price Chart (Source: Thomson Reuters)

1. NZX: FPH (Fisher & Paykel Healthcare Corporation Limited) (Recommendation: Buy, Potential Upside: Lower single digit to lower double digit)

EV/EBITDA Based Relative Valuation (Illustrative) (Source: Thomson Reuters)

*Industry multiple figure has been adjusted. The facts like FPH’s suppliers of raw materials are based in China and the fluctuations in the currency markets have been factored in.

Valuation:

The company’s respiratory humidifiers and consumables are directly involved in treating patients with coronavirus. There is an increase in demand globally and FPH has increased its manufacturing output. With respect to valuations, we have applied EV/EBITDA based relative valuation (on an illustrative basis) and the target price reflects that the stock price might witness an increase of lower single-digit to lower double-digit (in % terms). The company has also upgraded its guidance which could attract the attention of market players moving forward is an adjusted value.

2. NZX: OCA (Oceania Healthcare Limited) (Recommendation: Buy, Potential Upside: Lower double digit)

P/BV Based Relative Valuation (Illustrative) (Source: Thomson Reuters)

Valuation:

The company has stated that New Zealand is well recognised as it possesses a strong, integrated public health system, and aged care residential services happen to be an integral part. Moreover, the Ministry of Health has stated that, in the event of an outbreak, aged care providers would be having access to national stock of infection control materials as well as pharmaceuticals. Coming to valuations, we have applied P/B based relative valuation (on an illustrative basis) and the target price reflects an increase of lower double-digit (in % terms).

3. NZX: ARV (Arvida Group Limited) (Recommendation: Buy, Potential Upside: Higher single digit)

P/BV Based Relative Valuation (Illustrative) (Source: Thomson Reuters)

Valuation:

The company has recently confirmed that legal documentation has been executed to effect refinancing of the bank debt facility. Notably, the effective date of the refinance was April 6, 2020. ARV happens to be in the robust financial position and has current drawn debt of $313 million and $162 million of the undrawn credit. We have applied P/B based relative valuation (on an illustrative basis) and the target price reflects an increase of lower double digit (in % terms).

4. NZX: AFT (AFT Pharmaceuticals Limited) (Recommendation: Watch)

EV/EBITDA Based Relative Valuation (Illustrative) (Source: Thomson Reuters)

Valuation:

The company has recently made an announcement that it has concluded an agreement with Bank of New Zealand (or BNZ) to refinance the current 6-year CRG loan facility maturing on March 31, 2020. It was stated that refinancing gives AFT funding certainty and is expected to result in the finance cost savings amounting to $2 million per year over three-year term of the facility. The stock of the company is trading closer to its 52-week higher levels and, therefore, we advise the investors to wait for better entry levels. Also, the investors should watch for some more growth catalysts. Coming to the valuations, we have applied EV/EBITDA based relative valuation (on an illustrative basis) and there are expectations that the stock price might witness a correction of lower double-digit (in % terms) moving forward.

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