Healthcare Stocks: Navigating a Dismal Year for Opportunities
The healthcare sector has experienced a tumultuous time over the past couple of years. From the aftermath of the COVID-19 pandemic to unsettling political transitions, investors have felt an array of concerns. Notably, healthcare stocks lagged significantly behind broader market indices. While the S&P 500 celebrated a remarkable 27.6% return in 2023, the Health Care Select Sector SPDR exchange-traded fund barely scraped together a 2% gain. So far in 2024, the ETF has only managed a 4.5% return.
In light of these figures, it’s vital to explore the insights of renowned industry analyst Asad Haider, the head of the healthcare business unit at Goldman Sachs, who recently discussed these challenges and potential opportunities in a conversation with Barron’s. Haider’s analysis may provide the necessary understanding for investors looking to navigate the complexities of the healthcare market.
Understanding the Underperformance: Fundamentals Over Policy
Haider begins by underlining that the healthcare sector’s underperformance is not purely a consequence of political uncertainties stemming from President-elect Donald Trump’s impending administration. He points out that deterioration in company fundamentals and negative earnings revisions have been the primary drivers of healthcare’s dismal showing.
“Policy uncertainty may have exacerbated the situation, causing investors to rotate out of the sector, but the root cause lies in company performance,” Haider remarks. Over the past year, significant swathes of the sector have faced downward revisions, creating a challenging environment for stock performance and investor sentiment.
Driving Forces for Future Performance
Haider notes three fundamental factors that could reshape the healthcare landscape for potential outperformance in 2025:
- Macro shocks and economic climate: A hard landing or recession could lead to a reversion trade favoring healthcare stocks. However, Haider clarifies that this is not the current forecast at Goldman Sachs.
- Policy clarity: A more coherent political landscape could stabilize investor sentiment. Investors have become so deeply entrenched in political strategizing that it has become somewhat alarming, he warns.
- Improvement in company fundamentals: For healthcare stocks to regain traction, there must be positive revisions in earnings at the individual company level.
Subsector Opportunities: A Divergent Landscape
Despite the prevailing challenges at the sector level, Haider emphasizes that there are numerous stock opportunities. “There are massive divergences in industry subsectors,” he states, citing the stark contrast between Eli Lilly and Pfizer as examples. While Lilly’s stock has appreciated by 34% this year, Pfizer has sunk 11%.
This divergence offers potential for discerning investors. The need for careful stock selection is crucial as the healthcare sector presents unique opportunities, even amidst overall underperformance.
Navigating Political Appointments and Implications
Haider evaluates the implications of Trump’s healthcare appointments, including the nomination of Robert F. Kennedy Jr. as Secretary of Health and Human Services. He posits that the new leadership will likely push for deflationary policies within healthcare, which could stretch from drug-price reforms to cuts in entitlement spending, particularly affecting Medicaid.
Hospital operators face uncertainties driven by potential policy changes, especially their financial stability due to the possible expiration of Affordable Care Act subsidies. The second-order effects of such pressures must be evaluated thoroughly as they could impact procedure volumes.
Future M&A Activity: Anticipation, Challenges, and Trends
The topic of mergers and acquisitions (M&A) also arose during the discussion. Haider remarked on the preconditions for M&A activity remaining unchanged. Companies possess substantial M&A capacity, yet meaningful acquisitions have yet to materialize largely due to concerns surrounding valuation and the Medicare drug-price negotiation program.
“Bolt-on deals will continue, but broader strategic acquisitions may pick up pace as we progress through next year,” Haider predicts, encouraging investors to remain alert for favorable opportunities in this domain.
The Growing Complexity of Obesity Treatment Landscape
Turning to sectors that have generated significant buzz, the new obesity treatments from Eli Lilly and Novo Nordisk have dominated discussion. However, Haider believes the dynamics surrounding obesity medications are more complicated than the initial duopoly. This “complicated evolution” may present challenges ahead as investors assess which companies offer real product-cycle potential.
While Lilly appears to remain in a strong position, caution prevails for Novo,especially as investors brace for data disclosures regarding CagriSema, an updated obesity drug.
Looking Ahead: Areas of Opportunity in Healthcare
Despite the evident headwinds, Haider identifies several promising areas for investors heading into 2025:
- Medtech Innovations: Companies like Intuitive Surgical and Boston Scientific are anticipated to benefit from product-cycle drives.
- Biotechs to Watch: Mid-cap biotechs such as Madrigal Pharmaceuticals, Insmed, and Argenx hold interesting prospects.
- Drug Distributors: Leaders in drug and medical-supply distribution, including Cencora, Cardinal Health, and McKesson, reflect positive earnings revisions.
Haider concludes that while healthcare stocks face challenges, careful stock selection offers the potential for meaningful returns. Investors would do well to remain vigilant amidst shifting dynamics and evolving trends.
Summary
The healthcare sector’s journey through a dismal year presents an opportunity for strategic investors. With an emphasis on individual company fundamentals over overarching political dilemmas, there lies substantial potential in µto navigating the complexities of the healthcare landscape. Investors should remain proactive and selective to unlock opportunities in this ever-evolving industry.
