Columbia University Healthcare Policy Professor Meghan Fitzgerald joins Yahoo Finance Live to discuss the expectations for health care earnings, health care trends, investor sentiment, and the outlook for Johnson & Johnson’s consumer health company Kenvue.

Video Transcript

- Pharmaceutical Giants like Eli Lilly, Merck, and AstraZeneca, are set to report their quarterly results this week as well. Joining us now to weigh in on the health care trends investors should be watching ahead of these reports as well as the IPO of Johnson Johnson's consumer unit, Kenvue, is Meghan Fitzgerald, private equity investor and Professor of healthcare policy at Columbia University. Meg, it's great to see you.

It occurs to me-- and this is something that you sort of mentioned in your notes as well. That we are now obviously moving into the post-COVID period. And that goes for these health care companies as well. So what does this next phase look like for these companies? And what should investors be focusing on?

MEGHAN FITZGERALD: Yeah, I think if you had a strong balance sheet and you were diversified, you're sitting really well. We saw last week UNH, UnitedHealth, had a blowout report mostly due to Optum. So they are very diversified. Their CVS is looking good. Ella Vance added a million new customers and $2 billion of profit.

So I think what you're seeing, if you depended on COVID testing, COVID funding, and COVID shot, that's pretty much dried up. But if you had new business into primary care, care in the home, Medicare, Medicaid, you're sitting very strong. I think that's what we saw in that sector last week for sure.

- One of those names that's at the top of this health care stocks board that we're looking at right now, J&J, they are set to move forward with their consumer health division IPO. What are some of the details we know about that? Do you expect the markets to react positively to that and receive this division well as a standalone?

MEGHAN FITZGERALD: Yeah, great question. So here's the puts and takes. One, I would call that more of a corporate carve out not an IPO. We're seeing that with Baxter spinning out their renal division, Labcorp spinning out their covance division under the name of Fortrea. These are well-established businesses with high revenue and high profitability.

I think Kenvue's $15 billion in revenue last year, $2.1 billion in profit. So that's not really a de novo IPO, this is a well established business. Kenvue has some of the greatest brands in the world. Tylenol and a bunch of consumer brands we all know and like and are very familiar with. So I think this will certainly be a beacon and a bellwether for all the others that are doing corporate spin outs, and there's a lot of them.

I think the challenge for this is Kenvue is looking to raise more than has been raised to date. I think they were looking to raise like, 2.3 or $4 billion or maybe even more. And to date, there's only been $2.3 billion raised. So I think the challenge is the amount they're raising and that it's been a relatively quiet IPO season. However, I think most of the spin outs and carve outs have done better than de novo IPOs. So that's how I would size that up.

- It's also been quiet relatively in terms of deal activity. But farmers and health care is kind of an exception. We have seen some deals happen there. What does this year going to look like on that front? And where are the opportunities for investors?

MEGHAN FITZGERALD: Yeah, I think I shared with you this morning, last week was the third highest for M&A in biotech that we've seen in a really long time. I think $61 billion of M&A activity hit the tape in the last two months. So it's hard to believe we're talking about a potential recession later on in the year but yet, we might have a record year for biotech dealmaking.

Important to note for fair balance, most of those deals are in late stage, phase two, phase III. So a lot of the risk has been drained out of those deals. So anyone buying is paying at a premium, as we saw with Pfizer and Seagen, and they're buying for a pipeline that's pretty much on the market. They're not taking too much risk to wonder whether these are going to be FDA-approved portfolios.

So I think interesting times ahead, Julie. I think too soon to call it but biotech's starting to look like it's going to shape up to be a decent year if you have late stage assets or you're well funded and you have cash. There's a whole bunch of other companies that will start to look like zombies because they're too early stage and they can't raise any money.

- Does that consolidation create an environment where health care is safer at the end of the day? And I ask that because we've thought about this digital transformation and how it's impacted so many industries. But health care from a cybersecurity perspective has still been one of, if not the most vulnerable. So has there been any better securitization of the data that all of these companies are going to amass in one way or another about consumers?

MEGHAN FITZGERALD: Yeah, I think it's a totally fair point. Certainly, cyber is a big risk. And we've had enough high profile hospital and payer systems that have been held ransom for their data. However, that hasn't spooked investors enough to steer clear of it.

And I think most people would say health care is not recession-proof but it's certainly recession-resilient. And therefore during downturns and recessions, people tend to flock to health care. 60% of the payer is still the government and commercial payers, and people still need health care. And we're not seeing a slowdown, at least from my perch, volunteering across the street at the hospital. Patients are still coming in, there's still a backlog of surgery, there's still people that have multiple chronic conditions that need care. So I think health care, it's rightly labeled as resilient-proof for sure and certainly a defensive sector.

- Yeah, and I know you have a lot to say about the shortage of workers in the industry too but we'll get that to another time. Obviously, you're pitching in to do your part, as you just said, Meg. I want to take a little bit of a left turn finally and ask you about these hunger control drugs that have become all the rage, and investors are showing a lot of interest in them too. Novo Nordisk which makes Wegovy is the one that has gotten so much attention. What do you make of this trend? Is it sustainable? Is it something investors should be chasing?

MEGHAN FITZGERALD: Yeah, I mean, an interesting status. Three companies that captured the most value, enterprise value in pharma, two of the three had obesity products. So what does that say? I mean, these are products that are going to be $40 billion apiece if not more because the population is so huge. Half the American population is technically overweight. Pre-diabetes is a real thing. So I don't think these drugs are going anywhere.

I think the big concern right now I'm hearing, Julie, from a public health perspective is a lot of younger patients are starting to go on these, and we don't really have more than two years' worth of data. So we need long-term data to really find out, now that these drugs are in the real world, what they really do and what the side effects are. And I also think there's a concern that people that don't need to be on them are on them.

So I think the jury is still out on that, but it's just an enormous TAM, one of the largest. So I don't think in terms of performance, revenue, and profit, there's a reason Novo and these companies are doing very well, and it's because of these medicines.

- Meghan, always really great to speak with you. And thanks so much for the time. Really breaking down a ton of what we should be watching over the course of this earnings season but more broadly across the health care landscape. Meghan Fitzgerald, Columbia University professor of health care policy and private equity investor. Thanks so much.