An employee 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 erased much of its losses for the year during the December market rally. Successful biotech and medical device makers have seen the biggest rebound this month, and analysts see that momentum continuing into the new year.
However, analysts and strategists have a mixed outlook for the industry in 2024.
“We enter the year as an underweight,” said Sam Stovall, CFRA’s chief investment strategist. “There’s a lot of overhead resistance and they have to work through that overhead because a lot of investors might say, ‘let me get out and move on to something that has better growth potential.’
The second week of January could bring some big moves for names in healthcare when companies attend this year’s JPMorgan Health Conference in San Francisco. It’s one of the year’s largest healthcare gatherings of major industry CEOs, and companies often provide updates on earnings guidance and clinical trial research during the conference.
The political calendar could be one of the biggest challenges. The S&P 500 health care sector has lagged S&P 500 in four of the last six presidential cycles. Increased regulatory focus on drug prices could lead to another year of underperformance.
S&P 500 healthcare sector remains on pace for second straight annual loss, dragged by Covid vaccine makers Modern and Pfizerwhich are down more than 40% for the year. Eli Lillyup more than 55% for the year, it is the industry’s biggest gainer, fueled by demand for its diabetes and obesity drugs.
Here’s a look at which segments of the healthcare industry see continued pressures in 2024, which will be relieved, and which battered names are getting investors’ votes for recovery next year:
Big Pharma: Price Negotiations
Novartis scientist in laboratory packaging materials for transport.
In 2024, drug price negotiations with the Inflation Reduction Act will take center stage. Medicare officials will make their initial offers on the first 10 drugs selected for discussion on Feb. 1.
“This law was passed, and we want to implement it in the most thoughtful way,” said Dr. Meena Seshamani, deputy administrator and director of the federal Center for Medicine, “to really create a robust conversation in our health care system. do you realize that, how can we ensure access to innovative treatments that people need?’
Pharmacists have sued the administration but have opted to move forward with talks, complaining that negotiations in this country will be different from those they have had with other nations. They argue that US health insurers and pharmacy benefit managers may not pass full discounts on to patients.
“In a European market, when you negotiate a price, this drug is immediately available to patients, there are no prior approvals,” said Victor Bulto, president of Novartis’ US operations.
NovartisThe heart drug Entresto is among the first drugs selected for trading. Approved by the FDA in 2015, the negotiated Medicare discount on the drug will take effect in 2026.
Bulto argues that the IRA’s timing, which makes drugs eligible for trading after nine years on the market, will lead to less research into new indications for drugs such as cancer treatments.
“Usually we start researching in the sickest patients, where you find the benefit risk of your molecule, and then you want to start bringing data earlier,” he said, “to see if you can affect the cause of the cancer early. But that takes time and money and many investments”.
The big question for investors is how much of a discount the Biden administration will ask for from manufacturers. Pricing discussions are expected to remain private until the Centers for Medicare & Medicaid Services unveils its final price next September — unless the drugmakers decide to go public.
“We don’t intend to go out there publicly because we will be part of an ongoing negotiation with each individual manufacturer,” Seshamani said. But, he added, if the companies go public, Medicare could potentially do so as well.
Health insurance: Benefits management risks are cool
A CVS location in New York, USA on Thursday, February 9, 2023.
Stephanie Keith | Bloomberg | Getty Images
Insurers’ pharmacy benefit management divisions, known as PBMs, are under increasing regulatory pressure. CVS Health’s CVS Caremark, Cigna‘s Express Scripts and UnitedHealth GroupThe company’s OptumRxs together represent nearly 80% of the market share in the pharmacy benefit management business.
More than two dozen bipartisan bills have been introduced in Congress this year aimed at creating more transparency in PBM prices. However, given the House leadership struggles, neither measure gathered enough momentum to win approval from both houses of Congress.
“As we head into 2024, history has told us that the major health care regulatory reform events tend not to necessarily occur in an election year,” said Scott Fidel, health care analyst at Stephens.
Bank of America analysts see improving fundamentals for health insurers next year. They called Humana Their top pick for 2024, saying the Medicare insurer is best positioned for strong earnings.
“The reported M&A discussion between Cigna and Humana has raised questions about whether Humana itself is worried about its own growth prospects,” BofA analysts wrote in a note to clients. “We see Humana walking away from a deal as a validation of the key growth story going forward.”
Cantor Fitzgerald analyst Sarah James believes health insurers are well-positioned to face challenges such as higher patient medical costs and Medicare reimbursement changes next year. He also sees a buying opportunity if there are exits amid heated election-year rhetoric on health insurance.
“When you see multiple compression around election cycles is when you want to put incremental investment or money to work in the field, because it’s very rare that anything they talk about during their extreme speeches actually pans out,” James said.
Medical Devices: GLP-1 Pressure Raisers
A pharmacist displays boxes of Ozempic, an injectable semaglutide drug used to treat type 2 diabetes manufactured by Novo Nordisk, at Rock Canyon Pharmacy in Provo, Utah, U.S., March 29, 2023.
George Frey | Reuters
Shares of medical device makers were among the biggest losers this year as investors predicted that the rise in popularity of obesity drugs known as GLP-1 receptor agonists would reduce demand for things like diabetes management, replacements knees and bariatric surgery. Health Portfolio Manager Les Funtleyder Square.
“Just because there was a lot of concern that the GLPs were going to, you know, take away all the processes all the time. And that’s not going to happen. That’s going to play out over the next year,” Funtleyder said. “I think medical devices will be better next year.”
There are signs that the sector may have bottomed out in October. The iShares Medical Devices ETF has risen more than 15% in the past two months. Two of the industry’s biggest gainers were insulin pump makers Insulet and Dexcomwhich makes continuous glucose monitoring devices known as CGMs.
While both stocks have gained more than 40% in two months, analysts at Leerink Partners raised their price target on Insulet to $270 from $231 and raised their target on Dexcom to $144 from $128. Prescriptions for diabetes devices remain strong, Leerink said in a note to clients.
Diabetes players also have new products on the horizon that could fuel new profits next year, said BTIG analyst Marie Thibault.
“We believe investors are already looking ahead to the expected launch of a 15-day sensor for patients with type 2 diabetes without insulin in the summer of 2024,” Thibault wrote in a research note, adding that rival CGM maker Abbott Laboratories it is also expected to win approval for its new glucose wearable in the new year.
Relief for biotechnology and life sciences tools
Eli Lilly and Company, pharmaceutical company headquarters in Alcobendas, Madrid, Spain.
Cristina Arias | Cover | Getty Images
The battered biotech sector has erased its losses for the year during this month’s rally, with SPDR S&P Biotech ETF recovering more than 28% from the October low.
RBC analyst Brian Abrahams sees the momentum continuing into 2024, fueled in part by the run in GLP-1 drug makers such as Eli Lilly and Novo Nordiskwhich has left them flush with cash.
“The biotech sector may benefit more and be overshadowed less next year as we see potentially GLP-1 cash flows catalyze more M&A and biotech efforts to improve some of the weaknesses of leading GLP-1 agents emerge” , Abrahams wrote. in a customer note.
Smaller biotech companies have faced a cash crunch as the Federal Reserve raised interest rates over the past year, making it harder for them to access financing and invest in capital expenditures. This has had a negative impact on life science tools, but several investors see the picture improving next year.
“We don’t think interest rates are going to go much higher from here, and that eases pressure on high-value growth stocks going forward,” Advisor Capital Management portfolio manager JoAnne Feeney told CNBC. “And we think it’s taking the pressure off a lot of life science tool companies that were really hurt by the high interest rate funding challenges. We think that’s starting to taper off.”
Goldman Sachs analysts see life science tools posting stronger earnings than the overall health sector next year, after two years of declining sales growth. “We look for a stabilization and ultimately a resumption of an upward revision cycle in revenue and earnings that will allow the sector to show absolute outperform versus the market,” they wrote in a note to clients.
Goldman’s top tool picks for 2024 are Thermo Fisher, Avantor and Qiagen.
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