Healthcare Stocks Had a Dismal Year: Opportunities Ahead
The healthcare sector has experienced a challenging year, with drug companies, health insurers, and hospital operators taking center stage in negative headlines. As political turbulence ramped up following President-elect Donald Trump’s nominees for the government’s public-health bureaucracy, popular discontent towards the healthcare system came to the forefront. Despite the S&P 500 index seeing a commendable return of 27.6% in 2023, the Health Care Select Sector SPDR exchange-traded fund (ETF) managed a meager return of just 2%. When compared to the 29% return of the S&P 500 index so far in 2024, the question arises: how long will the pain last for the industry and its investors?
Asad Haider, head of the healthcare business unit within Global Investment Research at Goldman Sachs, shares valuable insights in an interview with Barron’s regarding the current situation in healthcare stocks and the potential opportunities lying ahead. Haider, who has been with Goldman since 2009 and has an extensive background in healthcare sector strategy, elaborates on policy uncertainty, the prospects for healthcare mergers, the future of weight-loss drugs, and more.
The Underperformance of Healthcare Stocks
When asked about the dismal performance of healthcare stocks over the past two years, Haider clarifies that the roots of this performance lie beyond just presidential nominations or political uncertainty. He notes that much of the healthcare sector has been plagued with negative earnings revisions throughout the year. “The stocks’ underperformance is primarily due to companies’ fundamentals being in question,” he explained, emphasizing the criticality of understanding the sector’s genuine issues when predicting future performances.
What Lies Ahead for Healthcare Stocks
So, what would it take for healthcare stocks to outperform the S&P 500 in 2025? Haider outlines three essential conditions:
- A macro shock: A hard landing or recession could lead to a mean-reversion trade, favoring healthcare.
- Policy certainty: Real clarity on political and healthcare policies would provide much-needed direction.
- Positive company fundamentals: Seeing earnings revisions trend in the right direction would mark a significant turnaround.
While the outlook for the healthcare sector as a whole may appear bleak, Haider believes that opportunities exist at the stock level, suggesting that individual stock performance can vary greatly within subsectors. For instance, Eli Lilly has seen a 34% stock surge this year, while Pfizer, in stark contrast, has seen an 11% decline.
Impact of Political Appointments
Regarding Trump’s healthcare appointments, Haider opines that they are likely to exert deflationary pressure on the healthcare sector. This pressure may manifest through drug-price reforms and potential cuts in entitlement spending, particularly affecting Medicaid.
However, he points out that, despite some subsectors like medtech showing resilience, hospital operators and providers face significant uncertainties until more information is available regarding the future of Affordable Care Act subsidies.
The Future of Mergers and Acquisitions
Concerning merger and acquisition (M&A) activity within healthcare, Haider underscores that big deals have been sparse. The industry is at a crossroads, as companies are cautious, wanting to gauge the impacts of the Medicare drug-price negotiation program amid a climate of potential regulatory changes under a new administration. He remains hopeful that M&A will increase next year, with likely bolt-on deals emerging, although larger opportunities may still be years away.
Shifting Focus in the Obesity Drug Market
The healthcare landscape is also witnessing shifts in the obesity drugs market, dominated recently by players like Eli Lilly and Novo Nordisk. Haider warns that the trade is becoming more complicated as the focus shifts from a duopoly to a wider range of competitive dynamics, as uncertainty looms over the efficacy of new drugs in the pipeline.
Insights for Investors
As for investment prospects moving forward, Haider emphasizes the importance of selecting companies poised for product-cycle-driven growth, particularly within medtech. Companies like Intuitive Surgical and Boston Scientific are highlighted as having notable potential upside, alongside interest in drug and medical supply distributors like Cencora, Cardinal Health, and McKesson, which are currently seeing positive earnings revisions.
In conclusion, while the healthcare sector struggles with complexities brought on by policy uncertainty and evolving market dynamics, savvy investors might find opportunities to capitalize on the divergences in stock performances across various subsectors. As Asad Haider aptly notes, although the bar for sector-level outperformance is high, the chance to pick the right stocks within the healthcare space remains paramount for investors looking to navigate through challenging times.