An worker works on the production line of pharmaceutical company Zentiva in Prague, Czech Republic, May 6, 2021.
David W. Cerny | Reuters
The health-care sector has worn out much of its losses for the yr through the December market rally. Beaten-down biotech and medical device makers have seen the most important rebound this month, and analysts see that momentum continuing in the brand new yr.
Still, analysts and strategists have a mixed outlook for the sector in 2024.
“We’re entering the yr as an underweight,” said Sam Stovall, chief investment strategist at CFRA. “There’s a number of overhead resistance, they usually have to work through that overhead resistance because a number of investors might say, ‘let me get out and move on to something that has higher growth potential.'”
The second week of January could bring some big moves for health-care names, when corporations present at this yr’s JPMorgan health-care conference in San Francisco. It’s one in every of the yr’s largest health-care gatherings of major industry CEOs, and firms often provide updates on earnings guidance and clinical trial research through the conference.
The political calendar could pose one in every of the most important challenges. The S&P 500 health-care sector has lagged the S&P 500 in 4 of the last six presidential cycles. Increased regulatory concentrate on drug prices could result in one other yr of underperformance.
The S&P 500 health-care sector stays on pace for a second straight annual loss, dragged down by Covid vaccine makers Moderna and Pfizer, which have fallen greater than 40% for the yr. Eli Lilly, up greater than 55% for the yr, is the sector’s biggest gainer, fueled by demand for its diabetes and obesity drugs.
Here’s a take a look at which parts of the health industry analysts see facing continued pressure in 2024, which can get some relief, and which beaten-down names are getting investors’ votes for a rebound next yr:
Big Pharma: Price negotiations
Novartis scientist in lab packing materials for transportation.
Source: Novartis
In 2024, Inflation Reduction Act drug price negotiations can be front and center. Medicare officials will make their initial offers on the primary 10 drugs chosen for discussions Feb. 1.
“This law was passed, and we wish to implement it in probably the most thoughtful manner possible,” said Dr. Meena Seshamani, deputy administrator and director of the federal Center for Medicare, “to really create a strong conversation in our health system in a way that, how can we ensure access to revolutionary therapies that folks need?”
The drugmakers have sued the administration but have chosen to proceed with discussions, while complaining that negotiations in this country can be different from those they’ve had with other nations. They argue that U.S. health insurers and pharmacy profit managers may not pass on full discounts to patients.
“In a European market, once you negotiate a price, that medicine is instantly available to patients, there isn’t any prior authorizations,” said Victor Bulto, president of Novartis’ U.S. operations.
Novartis‘ heart medication Entresto is among the many first drugs chosen for negotiation. Approved by the FDA in 2015, the negotiated Medicare discount on the drug will go into effect in 2026.
Bulto argues the IRA’s timeline, making medications eligible for negotiations after nine years available on the market, will result in less research for brand new indications on drugs like cancer treatments.
“We normally start investigating in the sickest patients, where you identify the profit risk of your molecule, and you then want to start bringing data earlier,” he said, “to see in case you can impact the reason behind cancer early. But that takes money and time and a number of investment.”
The large query for investors is how steep a reduction the Biden administration will ask of manufacturers. Price discussions are expected to remain private until the Centers for Medicare & Medicaid Services reveals its final price next September – unless the drugmakers determine to go public.
“We are usually not intending to go on the market publicly because we’re going to be a part of a back-and-forth negotiation with each individual manufacturer,” said Seshamani. But, she added, if the businesses do go public, Medicare could potentially accomplish that as well.
Health insurers: Profit management risks cool
A CVS location in Recent York, US, on Thursday, Feb. 9, 2023.
Stephanie Keith | Bloomberg | Getty Images
Insurers’ pharmacy advantages management divisions, generally known as PBMs, are under increasing regulatory pressure. CVS Health’s CVS Caremark, Cigna‘s Express Scripts and UnitedHealth Group‘s OptumRx together account for nearly 80% of market share in the business of administering pharmacy advantages.
Greater than two dozen bipartisan bills were proposed in Congress this yr, geared toward creating greater PBM price transparency. Yet, given House leadership struggles, not one of the measures gathered enough momentum to gain approval by each chambers of Congress.
“As we move into 2024, history has told us that you simply tend not to have the foremost regulatory reform events in health care necessarily play out in the election yr,” said Scott Fidel, health-care analyst at Stephens.
Analysts at Bank of America see improving fundamentals for health insurers next yr. They named Humana their top pick for 2024, saying the Medicare insurer is best positioned for strong gains.
“The reported M&A discussion between Cigna and Humana have raised questions on whether Humana itself is worried about its own growth outlook,” BofA analysts wrote in a note to clients. “We see Humana walking away from a deal as validation of the core growth story ahead.”
Cantor Fitzgerald analyst Sarah James thinks health insurers are well positioned to navigate challenges like higher patient medical costs and Medicare reimbursement changes next yr. She also sees a buying opportunity if there are pullbacks amid heated election yr rhetoric about medical health insurance.
“Once you see the multiple compression around election cycles is once you want to put incremental investments or money to work in the sector, because it’s extremely rare that anything they speak about during their stump speeches, actually pans out,” said James.
Medical devices: GLP-1 pressure lifts
A pharmacist displays boxes of Ozempic, a semaglutide injection drug used for treating type 2 diabetes made by Novo Nordisk, at Rock Canyon Pharmacy in Provo, Utah, U.S. March 29, 2023.
George Frey | Reuters
Shares of medical device makers were amongst the most important losers this yr, as investors predicted the surge in popularity of obesity medications, generally known as GLP-1 receptor agonists, would cut demand for things like diabetes management, knee replacements and bariatric surgery, said E-Squared health portfolio manager Les Funtleyder.
“Simply because there was a number of concern that GLPs are going to, you recognize, eliminate all procedures on a regular basis. And that is not going to occur. That’ll be proven next yr,” said Funtleyder. “I feel medical devices do best next yr.”
There are signs the sector can have bottomed in October. The iShares Medical Devices ETF has surged greater than 15% over the past two months. Two of the sector’s biggest gainers were insulin pump maker Insulet and Dexcom, which makes continuous glucose monitoring devices generally known as CGMs.
While each stocks have gained greater than 40% in two months, analysts at Leerink Partners raised their price goal on Insulet to $270 from $231 and boosted their goal on Dexcom to $144 from $128. Prescriptions for diabetes devices remain strong, Leerink said in a note to clients.
The diabetes players even have recent products on the horizon which could fuel fresh gains next yr, said BTIG analyst Marie Thibault.
“We expect investors are already looking toward the anticipated launch of a 15-day sensor for type 2 diabetes non-insulin patients in Summer 2024,” Thibault wrote in a research note, adding that rival CGM maker Abbott Laboratories can also be expected to gain approval for its recent glucose wearable in the brand new yr.
Relief for biotech and life science tools
Eli Lilly and Company, Pharmaceutical company headquarters in Alcobendas, Madrid, Spain.
Cristina Arias | Cover | Getty Images
The beaten-down biotech sector has worn out its losses for the yr during this month’s rally, with the SPDR S&P Biotech ETF rebounding greater than 28% from its October low.
RBC analyst Brian Abrahams sees the momentum continuing in 2024, fueled in part by the run-up in the GLP-1 drugmakers like Eli Lilly and Novo Nordisk, which has left them flush with money.
“The biotech sector may profit more and be less overshadowed in the approaching yr as we potentially see GLP-1 money flows catalyze more M&A, and biotech efforts to improve upon a few of the shortcomings of the leading GLP-1 agents emerge,” Abrahams wrote in a client note.
Smaller biotech firms faced a money crunch because the Federal Reserve raised rates of interest over the past yr, making it tougher for them to access funding and invest in capital expenditures. That had a negative impact on life science tools, but a variety of investors see the image improving next yr.
“We do not think rates are going to go much higher if in any respect from here, and that eases the pressure on high-valuation growth stocks going forward,” Advisor Capital Management portfolio manager JoAnne Feeney told CNBC. “And we predict it takes the pressure off a number of life sciences tools corporations that were really hurt by the funding challenges of high rates of interest. We expect that starts to ease.”
Analysts at Goldman Sachs see life science tools posting stronger gains than the general health sector next yr, after two years of declining sales growth. “We search for a stabilization and ultimately a resumption of an upward revenue and earnings revision cycle which should allow the sector to show absolute outperformance vs the market,” they wrote in a note to clients.
Goldman’s top tools picks for 2024 are Thermo Fisher, Avantor and Qiagen.
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