An employee works on a production line of pharmaceutical company Zentiva in Prague, Czech Republic, on May 6, 2021.
David W. Cerny | reuters
The health care sector has erased most of its losses for the year during December’s market rally. Weak biotech and medical device makers have seen the biggest rebound this month, and analysts expect that momentum to continue into the new year.
Still, analysts and strategists have a mixed outlook for the sector in 2024.
“We enter the year as underweight,” said Sam Stovall, chief investment strategist at CFRA. “There’s a lot of overhead resistance, and they have to work through that overhead resistance because a lot of investors may 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 health care names when companies present at this year’s JPMorgan health care conference in San Francisco. It is one of the year’s largest health care gatherings of major industry CEOs, and companies often provide updates on earnings guidance and clinical trial research during the conference.
The political calendar may be one of the biggest challenges. S&P 500 health care sector lags S&P 500 In four of the last six presidential cycles. Increased regulatory focus on drug prices could result in another year of poor performance.
S&P 500 health care sector headed for second consecutive annual loss, dragged down by Covid vaccine makers Moderna And PfizerWhich has fallen more than 40% for the year. Eli LillyThe sector is the biggest gainer, up more than 55% for the year, driven by demand for its diabetes and obesity drugs.
Here’s a look at which parts of the healthcare industry believe will face continued pressure in 2024, providing some relief, and which beaten-down names are getting investors’ votes for a comeback next year:
Big Pharma: Price Talks
Novartis Scientific in laboratory packing material for transportation.
In 2024, Inflation Reduction Act drug price negotiations will be front and center. Medicare officials will make their initial offer on the first 10 drugs selected for discussion on February 1.
“This law was 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 & Medicaid Services, “to really create a stronger conversation across our health system.” Understand this, how can we ensure access to the innovative treatments that people need?”
Drug manufacturers have sued the administration, but they have opted to continue discussions, while complaining that negotiations in this country will be different from those negotiated with other countries. They argue that U.S. health insurers and pharmacy benefit managers cannot give patients complete discretion.
“In the European market, when you negotiate a price, that drug is readily available to patients, with no prior authorization required,” said Victor Bulto, president of Novartis’ U.S. operations.
Novartis‘The heart drug Entresto is one of the first drugs selected for interaction. Approved by the FDA in 2015, a negotiated Medicare rebate on the drug will take effect in 2026.
Bulto argues that the IRA’s time limit, making drugs eligible for negotiation after nine years on the market, will result in less research on drugs for new indications, such as cancer treatment.
“We typically start the investigation in the sickest patients, where you establish the benefit-risk of your molecule, and then you want to start bringing in the first data,” he said, “to see if you can get cancer. “You can quickly impact the cause. But it takes time, money and a lot of investment.”
The big question for investors is how heavy a discount the Biden administration will ask for from manufacturers. Unless the drugmaker decides to go public, pricing discussions are expected to remain private until the Centers for Medicare and Medicaid Services unveils its final price next September.
“We’re not intending to go public there because we’re going to be part of a back-and-forth conversation with each individual manufacturer,” Seshamani said. But, he added, if the companies go public, Medicare could potentially do the same.
Health insurers: benefits management risks are cool
A CVS location in New York, US on Thursday, February 9, 2023.
Stephanie Keith | Bloomberg | getty images
Regulatory pressure on insurers’ pharmacy benefit management divisions, known as PBMs, is increasing. CVS Health’s cvs caremark, cignaexpress script and UnitedHealth GroupOptumRx has a market share of approximately 80% in the pharmacy benefits management business.
More than two dozen bipartisan bills were proposed in Congress this year aimed at creating greater PBM price transparency. Yet, given the House leadership struggle, neither measure gathered enough momentum to win approval by both houses of Congress.
“As we move into 2024, history has told us that major regulatory reform programs in health care will not necessarily occur in an election year,” said Scott Fidell, health care analyst at Stephens.
Bank of America analysts expect fundamentals to improve for health insurers next year. he named humana their top pick for 2024, saying the Medicare insurer is best positioned for strong profits.
“The reported M&A discussions between Cigna and Humana raise questions about whether Humana itself is concerned about its growth outlook,” BofA analysts wrote in a note to clients. “We view Humana walking away from a deal as validation of the core growth story going forward.”
Cantor Fitzgerald analyst Sarah James believes health insurers are well-positioned to deal with challenges such as higher patient medical costs and Medicare reimbursement changes next year. She also sees an opportunity to buy if shortages arise amid the heated election year rhetoric about health insurance.
“When you see a lot of pressure around election cycles, you want to put incremental investment or money to work in this area, because it’s very rare that they talk about anything during their speeches,” James said. are, that really comes across.”
Medical Equipment: GLP-1 Pressure Lift
A pharmacist displays boxes of Ozempic, a semaglutide injection drug used to treat type 2 diabetes manufactured by Novo Nordisk, at Rock Canyon Pharmacy in Provo, Utah, US, on March 29, 2023.
George Frey reuters
Shares of medical device makers suffered the most losses this year as investors predicted a rise in the popularity of obesity drugs, known as GLP-1 receptor agonists, for diabetes management, knee replacements and bariatric surgery. Will cut demand for things like, E- said. Squared Health Portfolio Manager Les Funtleder.
“Just because there was a lot of concern that GLP would, you know, eliminate all the processes all the time. And that’s not going to happen. That’ll be proven over the next year,” Funtleder said. “I think medical devices will perform best next year.”
There are indications that the sector may reach a low in October. iShares Medical Devices ETF There has been an increase of more than 15% in the last two months. The two biggest beneficiaries from the sector were insulin pump manufacturers insulating And dexcomWhich makes continuous glucose monitoring devices known as CGMs.
While both shares are up more than 40% in two months, analysts at Leerink Partners raised their price target on Insulate 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.
BTIG analyst Marie Thibault said diabetes players also have new products on the horizon that could boost new profits next year.
“We think investors are already looking toward the anticipated launch of the 15-day sensor for type 2 diabetes non-insulin patients in summer 2024,” Thibault wrote in a research note. Abbott Laboratories It is also expected to get approval for its new wearable glucose in the new year.
Relief for biotech and life science equipment
Eli Lilly & Company, pharmaceutical company headquartered in Alcobendas, Madrid, Spain.
Christina Arias | cover getty images
The beaten-down biotech sector has erased its year-long losses during this month’s rally. SPDR S&P Biotech ETF A return of over 28% from the October low.
RBC analyst Brian Abraham believes this momentum will continue into 2024, partly driven by a boom in GLP-1 drug makers. Eli Lilly And Novo NordiskDue to which they are facing shortage of cash.
“The biotech sector could see more gains and less shadow in the coming year as we potentially see GLP-1 cash flows catalyzing more M&A, and major GLP- Biotech efforts emerge to improve some of the shortcomings of the 1 agents.” In a customer note.
Small biotech companies faced a cash crunch as the Federal Reserve raised interest rates last year, making it harder for them to access funding and invest in capital expenditures. It had a negative impact on life sciences devices, but many investors see the picture improving next year.
“We don’t think rates are going to move much higher from here, and that will ease pressure on higher-valuation growth stocks,” Advisor Capital Management portfolio manager Joanne Feeney told CNBC. “And we believe that has taken some of the pressure off a lot of life sciences device companies that were really hurt by the funding challenges of higher interest rates. We think that’s starting to ease.”
Goldman Sachs analysts expect life sciences devices to post bigger profits than the overall healthcare sector next year after two years of declining sales growth. “We look for a stabilization and ultimately the resumption of an upward revenue and earnings revision cycle, which should allow the sector to show absolute outperformance compared to 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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