Column: Opportunities In Healthcare Stocks
[Written by Bryan Dooley]
The year 2023 has witnessed a rather wild ride in the equity markets, leaving investors with a sense of uncertainty. The chasm between market winners and losers has grown substantially, fueled in part by the relentless pursuit of inflation-fighting policies by global central banks, which have exerted considerable pressure on economic growth.
Amid this backdrop, the resounding success of technology stocks, driven by the surging interest in artificial intelligence [AI] has emerged as one of the defining narratives of the year.
In 2023, technology stocks have unquestionably emerged as the stars of the market. The MSCI Global Technology index, as of the end of August, posted a remarkable year-to-date gain of 40.2%, eclipsing broader market indices and significantly outperforming several key sectors. In stark contrast, indices such as the MSCI U.S. electric utility stock index witnessed a decline of 6.50% for the year, the U.S. energy sector only managed a modest 3.11% increase, and the MSCI world healthcare index inched up a mere 1.67%.
While AI and related technology stocks bask in the limelight, the medical technology sector quietly continues its rapid evolution. Pioneering developments in pharmacology and medical devices have compelled analysts to reevaluate growth prospects in crucial healthcare subsectors.
Recent weeks have seen increased interest on Wall Street in GLP-1 therapies. Eli Lilly and Novo Nordisk, pharmaceutical leaders, have experienced significant surges in their stock prices as they introduce innovative diabetes and weight loss drugs to the market.
Eli Lilly’s Mounjaro [tirzepatide], approved for type 2 diabetes, is currently in the midst of an expansive product launch. Mounjaro’s Q1 revenues far exceeded expectations, and industry experts now project it to become the world’s premier obesity treatment, with some patients achieving astonishing weight losses of up to 22.5%, and approximately half experiencing at least a 20% reduction.
Novo Nordisk’s Ozempic [semaglutide] is another contender expected to witness rapid sales growth in the coming quarters. Global Data Healthcare research forecasts a 23% sales increase for Ozempic in 2023, reaching a market-leading $12.5 billion, narrowly ahead of Eli Lilly, which anticipates sales of $8 billion. Both companies anticipate robust double-digit revenue growth in these groundbreaking products for years to come.
Beyond their efficacy in treating type 2 diabetes, these recombinant peptides are also indicated for reducing the risk of major cardiovascular events such as strokes, heart attacks, and mortality among adults with type 2 diabetes and established heart disease.
J.P. Morgan pharmaceutical stock analyst, Chris Schott envisions a long runway for growth in the obesity drug segment, given the escalating diabetes and obesity crisis in America. Currently, the distribution of these injectable drugs is primarily constrained by supply, with the potential for even greater demand in the latter part of the decade when tabular formulations become available.
Medical devices constitute another arena witnessing rapid innovation. Leading medical device manufacturer, Medtronic, has introduced leadless pacemakers. As cardiac rhythm management [CRM] technology advances, more practitioners are expected to opt for these devices over traditional ones. One notable benefit of this transition is the elimination of the cumbersome pacemaker wires that extend throughout the body, providing a more patient-friendly experience.
In addition to these breakthroughs, certain segments within healthcare remain resilient and reliable. One of our core holdings, Thermo Fisher Scientific, Inc., offers cutting-edge products in mass spectrometry, chromatography, and microscopy. These research tools often exhibit substantial customer loyalty, characterized by high switching costs. Moreover, they typically entail high-ticket items that generate recurring revenue streams, bolstering long-term stability.
While ongoing innovation promises to boost the valuation of market leaders, it’s essential to recognize that the healthcare sector possesses intrinsic defensive qualities. This defensive posture was evident last year when the MSCI World Health Care Index incurred a mere 5% loss in stark contrast to the S&P 500′s 18% decline amid recessionary concerns throughout 2022. Regardless of economic fluctuations, people’s need for medications and medical attention remains steadfast, rendering healthcare revenue and earnings remarkably resilient.
Healthcare stocks not only exhibit resilience in a faltering economy but also benefit from a prolonged growth runway as populations age across developed economies. The share of the population aged over 65 years in developed markets has steadily increased from under 9% in 1960 to 17% in 2015, with projections indicating a rise to 28% by 2050. Notably, the oldest demographic group [85+] consumes three times as much healthcare per person as those aged 65–74 and twice as much as those aged 75–84.
While both the short and long-term prospects for healthcare are indeed promising, government pricing policies under the U.S. Inflation Reduction Act enacted last year, present a potential modest headwind. Recently, the Biden administration began negotiations aimed at reducing drug prices, targeting pharmaceutical heavyweights including Pfizer, Bristol-Myers Squibb, and Eli Lilly & Co.
However, this development is unlikely to exert a significant impact on pharmaceutical company valuations in the near term. The ten drugs subject to the first round of negotiation have been on the market for a prolonged period, with industry analysts already anticipating generic competition at their later stage when the price reductions are expected to be applied in 2026.
Looking ahead, the healthcare sector presents ample opportunities for both growth and dividend income investors. Despite lagging behind in 2023, select pharmaceutical, biotechnology, medical device, insurance and distribution companies are well-positioned to thrive in the years ahead, offering a resilient sanctuary in an ever-evolving market landscape.
- Bryan Dooley, CFA, is the Chief Investment Officer at LOM Asset Management Ltd. Please contact LOM at +1 345 233 0100 or visit www.lom.com for further information. This communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult with their Brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority and a registered person with CIMA.
