First quarter M&A deals in Healthcare are at a 10 year high in according to Bloomberg as companies generating abundant free cash flow and overseas cash repatriation look for targets. The trend has continued through early April with a large acquisition announced by Novartis coupled with several pending mergers in the insurance & managed care sectors while speculation of bio-pharma mega-mergers is also percolating.

S&P 500 valuation multiples have compressed and so has the broader Healthcare sector – trading at a 1.2x multiple discount to the market while the Pharmaceutical sub-sector discount has remained abnormally wide (chart below).

We think M&A is one of the key catalysts for multiples to normalize – in addition to a solid earnings season & significant near-term results expected in biotech & pharma. See the latest Healthcare Leaders Summary (HHL Update).

Source: Bloomberg, April 9, 2018. Based on 12 month forward consensus P/E.

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