An employee works on the production line of the pharmaceutical company Zentiva in Prague, Czech Republic, May 6, 2021.
David W. Cerny | Portal
“We enter the year underweight,” said Sam Stovall, chief investment strategist at CFRA. “There's a lot of resistance and they have to overcome that resistance 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 changes for healthcare names as companies present at this year's JPMorgan healthcare conference in San Francisco. It is one of the largest healthcare meetings of the year for CEOs of major industries, and companies provide frequent updates on earnings forecasts and clinical trial research during the conference.
The political calendar could be one of the biggest challenges. The S&P 500 healthcare sector has underperformed the S&P 500 in four of the last six presidential cycles. Increased regulatory focus on drug prices could lead to another year of poor performance.
The S&P 500 healthcare sector remains on track for a second straight annual loss, hit by Covid vaccine makers Moderna and Pfizer, which have fallen more than 40% for the year. Eli Lilly is the industry's biggest gainer, up more than 55% a year, driven by demand for its diabetes and obesity drugs.
Here's a look at which parts of the healthcare industry analysts think will face continued pressure in 2024, what will see some relief, and which beaten-down names will get investors' votes for a rebound next year:
Novartis scientists in laboratory packaging materials for transportation.
Source: Novartis
In 2024, drug price negotiations under the Inflation Reduction Act will take center stage. Medicare officials will make their initial offers on Feb. 1 for the first 10 drugs selected for discussions.
“This law has been passed and we want to implement it in the most thoughtful way possible,” said Dr. Meena Seshamani, deputy administrator and director of the federal Centers for Medicare, “to really start a robust discussion in our health care system. “If we feel that, how can we ensure access to innovative therapies that people need?”
The drugmakers have sued the government but have opted to continue with talks while complaining that negotiations in this country will be different than those they have had with other countries. They argue that U.S. health insurers and pharmacy benefit managers may not be passing on the full discount to patients.
“When you negotiate a price in a European market, the drug is easily accessible to patients and there are no prior approvals,” said Victor Bulto, president of Novartis's U.S. operations.
Novartis' heart drug Entresto is among the first drugs selected for trial. The negotiated Medicare rebate on the drug was approved by the FDA in 2015 and will take effect in 2026.
Bulto argues that the IRA's timeline for making drugs negotiable after nine years on the market will lead to less research into new indications for drugs, such as cancer treatments.
“Typically we start by studying the sickest patients, where you want to determine the benefit-risk ratio of your molecule, and then start providing data earlier,” he said, “to see if you can target the cause of cancer can influence early on. But that takes time and money and a lot of investment.”
The big question for investors is how big a discount the Biden administration will demand from manufacturers. Price negotiations are expected to remain confidential until the Centers for Medicare & Medicaid Services announces its final price next September – unless the drugmakers decide to go public.
“We have no intention of making this public as we will be part of a back-and-forth negotiation with each individual manufacturer,” Seshamani said. But if the companies go public, she added, Medicare could potentially do so too.
A CVS location in New York, USA, on Thursday, February 9, 2023.
Stephanie Keith | Bloomberg | Getty Images
Insurers' pharmacy benefit management departments, 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 the market share in the pharmacy benefit management business.
This year, more than two dozen bipartisan bills have been introduced in Congress aimed at increasing transparency in PBM pricing. But given the leadership battles in the House, neither measure gained enough momentum to win approval from both chambers of Congress.
“As we head into 2024, history has shown us that major healthcare regulatory reforms don’t necessarily happen in election years,” said Scott Fidel, healthcare analyst at Stephens.
Analysts at Bank of America expect health insurer fundamentals to improve next year. They named Humana their top pick for 2024 and said the Medicare insurer is best positioned for strong gains.
“The reported M&A discussion between Cigna and Humana has raised questions about whether Humana itself is concerned about its own growth prospects,” BofA analysts wrote in a note to clients. “For us, Humana not committing to a deal is confirmation of the core growth story ahead.”
Sarah James, an analyst at Cantor Fitzgerald, believes health insurers are well-positioned to weather challenges such as higher medical costs for patients and changes to Medicare reimbursement next year. She also sees a buying opportunity if there are setbacks amid heated election year rhetoric about health insurance.
“When you see the multiple compression around election cycles, you want to put incremental investments or money into the sector because it's very rare that something they talk about during their election speeches actually works,” James said.
A pharmacist displays boxes of Ozempic, a semaglutide injection drug manufactured by Novo Nordisk to treat type 2 diabetes, at Rock Canyon Pharmacy in Provo, Utah, U.S., on March 29, 2023.
George Frey | Portal
Stocks of medical device makers were among the biggest losers this year as investors predicted that the rise in popularity of anti-obesity drugs known as GLP-1 receptor agonists would hurt demand for things like diabetes management, knee replacements and bariatric Surgery would reduce, said E-Squared healthcare portfolio manager Les Funtleyder.
“Just because there was a lot of concern that the GLPs were constantly going to abolish all procedures. And that won't happen. That will prove itself next year,” said Funtleyder. “I think medical devices will do best next year.”
There are signs that the sector may have bottomed out in October. The iShares Medical Devices ETF is up more than 15% in the past two months. Two of the sector's biggest gainers were insulin pump maker Insulet and Dexcom, which makes continuous glucose monitoring devices called CGMs.
While both stocks gained more than 40% in two months, analysts at Leerink Partners increased their price target on Insulet to $270 from $231 and their price target on Dexcom from $128 to $144. Prescriptions for diabetes devices remain high, Leerink said in a note to customers.
Diabetes players also have new products on the horizon that could drive new growth next year, said BTIG analyst Marie Thibault.
“We expect investors are already anticipating the expected launch of a 15-day sensor for type 2 diabetes patients off insulin therapy in summer 2024,” Thibault wrote in a research note, adding that competing CGM Manufacturer Abbott Laboratories is expected to receive approval for its new glucose wearable in the new year.
Eli Lilly and Company, pharmaceutical company headquarters in Alcobendas, Madrid, Spain.
Cristina Arias | Cover | Getty Images
The battered biotech sector has erased its annual losses during this month's rally, with the SPDR S&P Biotech ETF recovering more than 28% from its October low.
RBC analyst Brian Abrahams expects the momentum to continue into 2024, fueled in part by the rise of GLP-1 drugmakers like Eli Lilly and Novo Nordisk, leaving them flush with cash.
“The biotech sector could benefit more and be less dwarfed in the coming year as we may see GLP-1 cash flows drive more mergers and acquisitions and biotechnology efforts to improve some of the shortcomings of the leading GLP-1 compounds show up,” Abrahams wrote in a note to clients.
Smaller biotech companies faced a cash crunch as the Federal Reserve raised interest rates last year, making it harder for them to access financing and invest in capital spending. That had a negative impact on life science tools, but a number of investors expect things to improve next year.
“We don't think interest rates will go much higher from here, if at all, and that eases pressure on highly valued growth stocks going forward,” JoAnne Feeney, portfolio manager at Advisor Capital Management, told CNBC. “And we think it takes the pressure off a lot of life science tool manufacturers who have really suffered from the financing challenges of high interest rates. We think this is gradually easing.”
Analysts at Goldman Sachs expect life science tools to post stronger gains than the overall healthcare sector next year, after two years of declining sales growth. “We expect a stabilization and eventual resumption of an upward sales and earnings revision cycle, which should allow the sector to outperform the market in absolute terms,” they wrote in a note to clients.
Goldman's top tools picks for 2024 are Thermo Fisher, Avantor and Qiagen.
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