The healthcare sector’s return is little changed over the past twelve months, masking a volatile narrative that unfolded in what proved to be an eventful year for the industry. 2023 was a year of big accomplishments for healthcare that were overshadowed by interest rate hikes and an industry still normalizing following the pandemic. The sector registered one of the largest underperformances to the broader market in more than a decade. In a year when the S&P 500 rallied more than 20%, the healthcare sector flatlined. As we look ahead to an election year sure to place healthcare costs in the spotlight, it remains to be seen if investors will be lured by relatively low valuations. For individual companies within the sector however, the pace of innovation appears to be ramping up just as the COVID hangover goes away. As the spectacular performance of GLP-1’s in 2023 highlight, investors will still reward innovation. In 2024, perhaps, with a more dovish Fed.
Starting with big pharma. Coming into the year, investor focus was on Alzheimer’s disease following Biogen’s unexpected, albeit modest, success. While significant strides were made in treating this devastating disease, the actual benefit to patients and sales thus far are coming up short of expectations. The narrative quickly shifted to weight loss after Novo Nordisk demonstrated a positive impact on heart health through weight loss. While everyone knew losing weight had health benefits, substantiating this with data compels the insurance companies to cover the weight loss drugs. The GLP-1 weight loss story quickly spread and even the CEO of Pepsi was questioned about its impact to sales of chips and soda. Stocks of some medical device companies were halved as analysts feared a drop in diabetes monitoring, hip replacements, and gastric bypasses. While Eli Lilly and Novo Nordisk are expected to generate more than $50 billion from these drugs, it turns out Americans are still eating chips and soda while also getting hips replaced. In 2024 we hope to see more convincing data from additional Alzheimer’s disease trials concluding. We might see a breakthrough in non-addictive pain management – another potential blockbuster sales opportunity.
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Biotechs were clobbered in the first ten months of 2023 in an environment dictated by higher interest rates. Given the nature of biotech which heavily invests in research and development of new treatments, the industry found itself in a challenging position as the Federal Reserve raised rates and increased the cost of capital. The collapse of Silicon Valley Bank in March, a major financier of biotech firms, further exacerbated the funding shortage. Consequently, biotechs were stuck in a downturn until the end of October when the Fed decided to pause rate hikes and instigated a remarkable rally. Despite the challenges faced throughout the year, 2023 concluded on a high note with a groundbreaking achievement – the FDA approved the first gene-editing therapy ever, for sickle cell disease. Sickle cell, like thousands of other diseases, is caused by a genetic mutation. Never before have scientists had a tool to cure these diseases, symptoms might be treated but the underlying disease was never cured. Advances in genomics are paving the way for a very exciting future in biotechs, and possibly for their stocks with an increasingly dovish Fed. Sentiment appears to be shifting though with a handful of acquisitions announced in the final weeks of the year.
Looking forward to a year many anticipate will be favorable for stocks given lower rates, the opportunity is ripe for certain companies in the healthcare sector. With labor shortages improved, supply chain issues resolved, and an industry on the cusp of generational breakthroughs, sector fundamentals should improve. As we saw in 2023 when Eli Lilly overtook Johnson & Johnson to become the largest in Pharma, investors reward innovation.
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