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How Consumers and Tech are Disrupting Healthcare

J.P. Morgan's top-ranked research analyst, Lisa Gill, discusses the 2020 outlook for healthcare.
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Lisa: The consumer's the biggest disruptor in healthcare. The consumer wants their services where they want them, when they want them, at the lowest price. And so, as we think about the disruptions that are happening in the marketplace, we think that drug retails have the opportunity to utilize that footprint that they have today to provide more services.

Today, your out-of-pocket costs on average are north of $2,000. So, you're really, as a consumer, thinking about how do I want to spend those dollars? Where am I going to get the best outcome for the lowest cost? When we think about companies using technology to really enhance the consumer experience, it's really across the board. It's one, making it easier, for example, to check into the physician’s office. It's two, things like Telehealth and Telemedicine reaching that patient where they want to be reached. Three, it's through data analytics where you're sharing that back with the member. Millennials and Generation X'ers, most of them don't have a primary care doctor today. So, we think about them getting most of their information from a handheld device. They'll look it up, they'll say, "Is there a clinic near me "to be able to get the services that I want?"

As we think about the future of technology, we think about things like artificial intelligence. For example, in oncology, where you can gather information in a short period of time, make that diagnosis from a clinical perspective and really get the patient on the right treatment protocol. As we think about things like blockchain technology, the ability to be able to take your medical records with you wherever you go. You might be halfway around the world and the ability to be able to access that. I think that those are the things that we'll see come to the market over the next several years.

Chris: Heading into 2020, we see really a continuation of some very positive trends that we've seen for the last few years. We're really seeing the industry harnessing new technologies, whether that's gene therapy, cell therapy, bispecific antibodies, and harnessing those technologies to really meet unmet need in the industry. What we see that translates to is a continued robust pipeline of new products going into the FDA and really nice outcomes for patients as we start to address a lot of these disease states that haven't really had great solutions historically.

You can't just develop a drug anymore. You need to make sure that the patients get access to the product, that they can afford the product. Patient affordability is really front and center in almost every conversation, whether it's a pharma company or a biotech company these days. Patients are being increasingly aware and exposed to the cost of medication.

We're seeing much more constructive dialogue between not just the pharma companies developing drugs, but the pharma companies engaging with payers and really making sure not that the drug is approved, but also that the patient can afford it and get access to the product as well.

Think about the pharma industry longer term, we do have another major patent cycle we're gonna have to deal with starting in 2025. If we think about the last patent cycle, it had almost no pipeline, you had very few of these smaller biotech companies that you could look to partner with or outright acquire. I look where we are today, we've got internal pipelines that are in much better position than they've been historically, and we've had this wave of new smaller companies with really interesting science.

And on top of that, we've had an FDA that has looked to really partner with the industry, especially look at some of these very differentiated new products coming to market where you maybe need different endpoints or pathways than existed historically.

Mike: We expect 2020 to be another exciting year in healthcare coming off of a very strong 2019. We had really strong equity issuance in both biotech, medical technology, and healthcare services.

Which is rare to have all three sectors performing as strongly as they did in ECM space. In M&A, we saw a number of transformational deals that we expect will continue in 2020. We saw great investor receptivity to transformational M&A in 2019 and expect the low volatility backdrop of the equity capital markets to be very fertile ground.

We expect the presidential elections to create incremental volatility throughout the year, which will start to pick up in the second half of the year. So we expect a very busy first half of the year, both in issuance and M&A. In biotechnology, we expect both vertical integration and building of scale to lead to more M&A. In terms of medical technology, we also continue to see innovation cycle as capital continues to pour in and as big buyers, big companies, do continue to consolidate smaller companies. And in the services space, vertical integration of technology is becoming increasingly important.

Over the next 10 years, we expect changing demographics to continue to impact healthcare. We expect drug pricing and general affordability of care to be major topics that will continue to come to the forefront. We also expect to continue to see technology both help address those issues as well as be involved in the delivery of care and care itself going forward more and more.

Kimberly: We've been working in healthcare for over 10 years. We've been heavily focused in medical imaging and life sciences and drug discovery. And with the real burgeoning artificial intelligence community, what we've seen is the last five, six years, the research community in all facets of healthcare have really embraced artificial intelligence. And we're seeing this make its way into all of the different practices of healthcare. Everything from reinventing how we're doing genomics and drug discovery to the clinical care process and even getting now into preventative care and all of the different sensors that are entering this space.

Jason: Well, just in the U.S. 65 million people live in primary care deserts where there is not good enough access to healthcare, the physician shortages are rampant, and that's for medical care much less when you're talking about behavioral where there are tremendous access issues, there are stigmas about getting care. So it certainly addresses that need here in the U.S. And in fact, we think about virtual care as sort of the great equalizer when it comes to access to healthcare globally. So globally about 60 percent of the word's population has a mobile device and that gives them access to healthcare, regardless of where they are.

Noelle: Hi, I'm Noelle Grainger, Global Head of Equity Research, and I'm here, live, in New York City with our U.S. Media Analyst, Alexia Quadrani. In the rapidly-shifting media landscape, sports rights are the ultimate prize, and we're here today to talk about the impact they're having on the media companies and the advertisers. Thanks for joining me, Alexia.

Alexia: Thanks for having me.

Noelle: So, to get started, could you talk at a high level about actually how sports rights work, and give us an update on the state of the industry today?

Alexia: Absolutely. Sports rights are still extremely valuable, actually becoming more valuable every year it seems, at least in this country. The way it works, is you have these sports leagues, such as the NFL, the NBA, and those sell their content to a distributor, sometimes more than one distributor, a linear distributor, even some digital distributors. For a long period of time, anywhere, the contracts go anywhere from one year, sometimes 10 years. In fact, I'd say 10 years are becoming more and more common, because the media companies would like the rights for a longer period of time. The numbers that these guys are paying are staggering.

To give you a perspective, the "Monday Night Football" package goes for just under $2 billion per year, and the prices just keep going up. We just saw the "Thursday Night Football" package for the NFL recently be renewed by another broadcaster, and they paid 30% more per game than the previous broadcaster did, and it was widely known that the previous broadcaster was not making any money on the deal. So that's really quite incredible.

And there's another example that is the NBA, which was renewed a few years ago. And I believe they paid three times the price of the previous contract. So, they keep going up and up and up. And again, these contracts are signed for many years. We actually won't see renewals for a lot of these, such as the NFL or the MLB or the NHL, into the next decade. And I believe the NBA goes even further out than that. Right now, the big sports rights are really with traditional media for the large part. There is some dabbling by the digital companies. For example, Amazon has some rights to Thursday night football, and I believe there's some baseball rights on Facebook. But by and large, the big rights stay now with traditional media companies.

Noelle: So given that sports is one of the last appointment-viewing opportunities on TV, does that means that sports rights really give certain players competitive advantages?

Alexia: Oh, absolutely. You really can derive a lot of benefits from having these sports rights, for example, from the advertising side. Advertisers will pay top rates to advertise on these live sporting events. If you think about it, viewership of TV is generally declining. So if you have one area like sports rights where you're actually still seeing mass audience tune in to watch it live, advertisers realize this is so scarce and therefore even more valuable. So they're paying higher rates for it. Even the instances where you're seeing some of the ratings go down in some live sports, you're still seeing pricing go up on those programming.

The other way they make money from it as well, meaning the media companies, is they'll charge higher rates to the distributor, or they'll have more leverage negotiating with a distributor, meaning the cable company, the telecom company, to pay for their network because they have this valuable content. So, you know, so far they're doing quite well with it.

Noelle: I would imagine that demographics are playing a big role in this part of the industry. So, could you talk a little bit about as we see younger audiences really streaming content including live content, live sports, how do you see the advertisers adapting and innovating to these changes in behavior?

Alexia: Oh, the advertisers are definitely adapting. They realize that consumption is changing, and they wanna change with it. Really, the ability to advertise on live digital streaming is the holy grail. That's where we, sort of the advertisers wanna be able to do effectively. If you think about it, that's where you can get a targeted, kind of a timely and an engaged audience. What we're waiting for is really to see, and it's starting to happen, I would say we're probably in the second inning.

But what we're waiting for is to see a bigger mass of audience, a bigger scale watching the live- streaming product. There's obviously more and more people watching digital viewing right now but not watching a live streaming. So we need the big scale to make it very attractive for the advertiser. We also need better measurements so they know if their advertising is working, and, of course, more advancements in technology. But it's definitely the direction we're going.

Noelle: So as that digital scale builds, how do you see the traditional media companies needing to adjust their offerings, their game plan to be able to compete with these new channels where consumers are going to view live sports? And how does that affect the sports rights market coming forward?

Alexia: It's definitely changing. The media companies recognize that consumption of media is changing, and it's going more and more in a digital format. However, live events still work on TV. I mean, we're seeing, if you look at, whether it's live sports or news or reality shows or some of the award shows, that's where you're still getting this massive audience. And it seems to be working for the media companies to continue to broadcast in that way. Having said that, they're absolutely cognizant that the world is changing. So, they're all investing in their digital platforms, and they're all offering a lot of these live events in a streaming platform. And that is absolutely, I'd say, the main focus or big focus in investment for these media companies just to keep investing in the digital platforms and moving that direction.

Noelle: They're doing their best to compete at this point.

Alexia: Absolutely.

Noelle: Let's talk about the broadcasters for a minute. How do sports rights' deals impact them, and then on the advertising side, as these prices just go higher and higher, how does-- does that impact ad costs?

Alexia:Absolutely. The broadcasters right now are sort of in a good spot in the sense that I think the leagues still favor the broadcast in terms of where they'd like to see their content played because the broadcasts still have the mass reach. If you think about a league, and they're worried about audiences declining, the last thing you wanna do is accelerate the decline by taking away from the big platform and moving it to a digital platform where you may not have the same live audience.

So right now, the leagues favor the broadcasts and the cable networks. We'll see if that changes. You know, the advertisers are also clinging to that because that's where they get their live audience. But it'd be very interesting to see in the next round of renewals when these contracts come up again in the next decade if things change, and maybe a digital player will come in with a huge checkbook. And maybe the leagues will realize this is the future. It'd be very interesting to see if it changes, and we see one of these major contracts be awarded to a digital player.

Noelle: It's clearly a very dynamic and interesting part of the media space right now.

Alexia: Absolutely.

Noelle: Thank you so much, Alexia, for sharing your time and your insights with us. And thank you everybody for joining. And if you'd like more insights from J.P. Morgan's Global Research Team, please visit jpmorgan.com. Thank you.

Ryan: Hi, thanks for tuning in. I'm Ryan Brinkman, U.S. Automotive Equity Research Analyst for J.P. Morgan. And I'm here with Natasha Kaneva, Head of Metals Research and Strategy for J.P. Morgan Global Commodities Research. We're here to discuss a report recently released by Global Research regarding the outlook for the global electric vehicle market. Natasha, could you help to explain at a high level the vehicle electrification model that we have created? What does it encompass?

Natasha: Thank you Ryan. The underlying idea behind the report was that the average chances of a group of people is always more precise than that from each individual separately. So from, by definition, the larger the group of participants in a particular project and the more diverse this group is, then the lower the margin of error. So with that in mind, the report leverage is the work of 14 different J.P. Morgan teams. For starters, we use the feedback or the numbers, even numbers given by us from five different auto equity teams, regional teams, one from the U.S., Europe, China, Japan and South South Korea. So those numbers then were adjusted by better chemistry's by three different regional teams from our other chemicals and battery chemicals teams. And then those numbers were further utilized by five different regional mining teams and the global commodity team to derive the demand numbers for metals. So the main conclusion from that report was-- is that considering that all those inputs into the models were completely independent, the idea behind that was that because of that, the main output from the model is unbiased for any particular sector, any particular commodity or any particular region. So with that in mind, actually the pulled number from the model showed a global EV penetration rate by 2025 of below 8%. Those-- this number is, slightly more optimistic than the previous number published by J.P. Morgan on the global scale. The number is still quite conservative. What we seeing from other sell-side research banks, this number, we were pegging it around 14 to-- 10 – 14% penetration rates. So we are quite conservative in our estimates.

Ryan: That's great. Thanks. And the U.S. team that I lead, I contributed to the model by estimating the trends for vehicle electrification in the North America region. Our thought process is that with U.S. administration's proposed relaxation of corporate average fuel economy standards, effectively capping them at 2021 levels instead of growing aggressively through 2025 as was previously planned under the earlier administration that there may be less of an increase in battery electric vehicles in the North America market than might've been previously imagined. But at the same time, perhaps more growth in lesser degrees of electrification. For example, hybrids, plug-in hybrids that also increased the efficiency of vehicles, but not as much and in a more cost effective way. I'm curious what trends you were able to identify outside of the North America market. Where are battery electric vehicles, for example, expected to grow the most quickly? Which country in the world, is expected to have the greatest concentration of these vehicles?

Natasha: Correct. So I think one of the conclusions is that it's inevitable, it's coming. So we, I think there is no arguing about that, but at the same time, this, the pace of penetration will most likely be gradual. And we see this gradually in China. That's a very good example. The numbers are showing by 2025, still 84% of all the cars sold in China actually not going to be in any form electrified. So there will be internal combustion engines. But at the same time we see enough regional variance. And on the other side of the spectrum is of course Europe, where our forecasts are calling that by 2025, there will be no internal combustion engine vehicles sold at all. At the same time, I think what is interesting to point out is that while we still see a relatively lower electrification rate coming out of China, at the same time, the better electric vehicle penetration would be very high just given the scale of production. But given the propensity of the Chinese auto makers towards smaller battery packs, this does not necessarily, result in higher materials used in those battery packs.

Ryan: I see. And in with regard to the battery specifically, obviously a very important component in battery electric vehicles. What are the metals that are used most in the vehicles, and which metals are expected to increase the most going forward?

Natasha: So what we're seeing is a very strong tendency from the battery producers as the technology is moving very, very fast towards higher nico-- higher nickel chemistrys in the battery packs expand-- at the cost of the cobalt. So A, it gives them higher energy density for sure, but at the same time, what was the battery makers, it's to move away from cobalt, which is a metal considered with, with a problematic supply chain.

Ryan: I see. And which are the metals that you see as having the most demand in 2025?

Natasha: Considering our quite conservative penetration rate towards 2025 and when we feed all those models into our supply demand models, the answer is clearly it gives enough opportunity for the space to grow from, just from the demand from the electric vehicles. But at the same time, the numbers I would have to say are relatively light compared to consensus. So in terms of the biggest usage out there, we still see-- lithium for example, we see this year balanced market. But going, going forward, we don't see any shortages in, in lithium until at least middle of next decade. Very similar conclusion as in cobalt. It's a very well supplied market, at least not until 2023. Nickel is an interesting market because it sparks a lot of interest out there. We do see that demand will increase almost 10 times between now and 2025. We do believe that the prices will have to respond post- 2020. And then there are metals which are not used in the batteries, but at the same time they're, they have to be employed, if we're going to, develop the sector, for example, to charge the electric vehicles, we need charging stations, which are extremely copper intensive, then the cars have to become lighter. That's aluminum away from steel. So the PGM sector will get affected very strongly. The biggest loser in our opinion would be most likely platinum and palladium will be the winner.

Ryan: I see. And as you mentioned, a lot of industry observers believe that vehicle electrification is inevitable. Does it matter, though, how quickly the industry transitions to electrification for the metals market, and how much and how quickly do you think that the industry does electrify?

Natasha: Yes, absolutely. So again, the conclusion from the report was it's gradualism yes, it will happen gradually. We do believe that the inflection point will be past 2025. One of the points made during the process of coming up with the research was that we intentionally decided to make the cut off date at 2025 – why? Because we have very little visibility beyond 2025. So if we had extended it towards 2030, most likely would have like a hockey stick type of a penetration rate post-2025 which we decided not to do for now. So...as far as… as long as we're assume that the inflection point is past 2025, the miners still have plenty of time to react and to come up with more supply to satisfy the demand. If we assume that it's moving closer to us, for example, 2020, 2021, then there is no time for them to react because looking just the capital expenditure in the space, it peaked in 2013 and it has not increased since then. So pretty much what it means is that there will be shortages and the prices would have to respond accordingly.

Ryan: That's great. Thank you very much Natasha. And thank you everyone else also for tuning in. To learn more, visit jpmorgan.com.

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