After providing sector analyses of top government contractors in the Industrial, Defense, and IT/Services sectors, we now turn our attention to the Healthcare sector. We will highlight what trends drove healthcare company performance in the first half of H1 2023, potentially looking into the second half of the year as well. As Healthcare was the last of the industries we wanted to cover from a sector perspective, we will revert back to individual company highlights in our next articles.

Key Points:

* Healthcare H1 2023 revenue growth of negative 1% Y/Y on average, but when we consider the median growth of 9.15% we see the outsized effect the collapse in Pfizer sales has on the sector.

* Drugmakers were the weakest sub-sector in H1 2023, posting a 24.85% revenue decline and deteriorating net income margins. Nevertheless, companies grew R&D spending 2% on average.

* Pharmaceutical distributors delivered 10.5% revenue growth in H1 2023 and generally improving net income margins.

* Health Insurance was the single best-performing sector – sales grew 12.3% with net income margins improving as well.

* In H1 2023 companies increased capital expenditures by 15.2% on average. Looking into H2, Drugmakers expect smaller revenue declines while the rest of the industry grows at the H1 2023 pace.

Revenue Developments

Revenue growth in H1 2023 among our selection of large government contractors in the Healthcare sector was highly polarized, with COVID-19 vaccine, treatment and test beneficiaries experiencing declines, while the majority of companies posted reasonable sales growth:

Figure 1: Year-over-year revenue trends at select large government contractors

Source: Company disclosures for H1 2023

Across the six companies in our list, top-line growth came in at negative 1% on average, but when we consider the median growth of 9.15%, we see the outsized effect the collapse in Pfizer sales has on the sector.

From a sub-sector perspective, the results varied significantly across our selection:

• Drugmakers (Pfizer, Roche) posted the weakest results in H1 2023, with sales dropping 24.85% Y/Y on weakness in COVID-19 business areas,
• Pharmaceutical distributors (McKesson, Cencora and Cardinal Health) reported revenue growth of 10.5% in H1 2023, driven by growth in core distribution businesses and healthcare services.
• Health Insurance (Humana) was the single best performing sector, with revenue growth of 12.3% in H1 2023 helped by higher interest rates.

Looking into H2, companies are generally optimistic, with Drugmakers expecting smaller revenue declines while the rest of the industry grows at the H1 2023 pace.

Net Income Developments

Net income margin developments mirrored revenue trends outlined above, with our selection showing profit movements from minus to plus 50% Y/Y:

Figure 2: Year-over-year net income trends at select large government contractors

Source: Company disclosures for H1 2023

From a sub-sector perspective, Drugmakers reported lower margins while Pharmaceutical distributors and Health Insurance generally managed to grow profits in excess of sales growth.

Future Revenue Drivers

We will now highlight Research and Development (R&D) and Capital expenditures growth where reported at the companies in our coverage:

Figure 3: Research and development and capital expenditures growth at select large government contractors

Source: Company disclosures for H1 2023

Despite decreasing sales, Drugmakers continued to invest in new pharmaceutical development, with R&D spending growing 2% Y/Y on average.

The six companies in our coverage also ramped up capital spending, with expenditures on property, plant and equipment growing 15.2% on average, notwithstanding declines at individual companies.

Conclusion

H1 2023 saw a reversal of the trends observed in 2022, with COVID-19 becoming endemic. As a result, Drugmakers which had benefited strongly from the sale of vaccines, therapies and tests saw their sales decline 24.85% Y/Y, with profits dropping at an even faster rate. The silver lining is the companies kept investing in R&D and capital expenditures.

Pharmaceutical distributors were the second best performing group, growing revenues10.5% in H1 2023, with marginal declines due to COVID-19 at individual companies more than offset by core business growth and expansion in healthcare services. Profit margins expanded at almost all companies in our coverage.

Health Insurance posted the highest sector growth at 12.3%, boosted by higher interest rates and stronger capital ratios. The strong revenue momentum was coupled with net income margin expansion.

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This article was written by members of TenderAlpha's team and does not serve as a recommendation to buy any stock mentioned within. TenderAlpha is not receiving compensation for it and we have no business relationship with any company whose stock is mentioned in this article.