Health sector themes to watch in 2024

The health-care sector has wiped out much of its losses for the year during the December market rally. Beaten-down biotech and medical device makers have seen the biggest rebound this month, and analysts see that momentum continuing in the new year.

Still, analysts and strategists have a mixed outlook for the sector in 2024.

“We’re entering the year as an 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 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 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 could pose one of the biggest challenges. The S&P 500 health-care sector has lagged the S&P 500 in four of the last six presidential cycles. Increased regulatory focus on drug prices could result in another year of underperformance.

The S&P 500 health-care sector remains on pace for a second straight annual loss, dragged down by Covid vaccine makers Moderna and Pfizer, which have fallen more than 40% for the year. Eli Lilly, up more than 55% for the year, is the sector’s biggest gainer, fueled by demand for its diabetes and obesity drugs.

Here’s a look at which parts of the health industry analysts see facing continued pressure in 2024, which will get some relief, and which beaten-down names are getting investors’ votes for a rebound next year:

In 2024, Inflation Reduction Act drug price negotiations will be front and center. Medicare officials will make their initial offers on the first 10 drugs chosen for discussions Feb. 1.

“This law was passed, and we want to implement it in the most thoughtful manner possible,” said Dr. Meena Seshamani, deputy administrator and director of the federal Center for Medicare, “to really create a robust conversation in our health system in a sense that, how can we ensure access to innovative therapies that people need?”

The drugmakers have sued the administration but have chosen to proceed with discussions, while complaining that negotiations in this country will be different from those they’ve had with other nations. They argue that U.S. health insurers and pharmacy benefit managers may not pass on full discounts to patients.

“In a European market, when you negotiate a price, that medicine is readily available to patients, there’s no prior authorizations,” said Victor Bulto, president of Novartis’ U.S. operations.  

Novartis‘ heart medication Entresto is among the first drugs selected for negotiation. Approved by the FDA in 2015, the negotiated Medicare discount on the drug will go into effect in 2026.  

Bulto argues the IRA’s timeline, making medications eligible for negotiations after nine years on the market, will result in less research for new indications on drugs like cancer treatments.

“We normally start investigating in the sickest patients, where you establish the benefit risk of your molecule, and then you want to start bringing data earlier,” he said, “to see if you can impact the cause of cancer early. But that takes time and money and a lot of investment.”

The big question for investors is how steep a discount the Biden administration will ask of manufacturers. Price discussions are expected to remain private until the Centers for Medicare & Medicaid Services reveals its final price next September – unless the drugmakers decide to go public.

“We are not intending to go out there publicly because we’re going to be part of a back-and-forth negotiation with each individual manufacturer,” said Seshamani. But, she added, if the companies do go public, Medicare could potentially do so as well.

Insurers’ pharmacy benefits management divisions, 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 market share in the business of administering pharmacy benefits.

More than two dozen bipartisan bills were proposed in Congress this year, aimed at creating greater PBM price transparency. Yet, given House leadership struggles, none of the measures gathered enough momentum to gain approval by both chambers of Congress.

“As we move into 2024, history has told us that you tend not to have the major regulatory reform events in health care necessarily play out in the election year,” said Scott Fidel, health-care analyst at Stephens.

Analysts at Bank of America see improving fundamentals for health insurers next year. They named Humana their top pick for 2024, saying the Medicare insurer is best positioned for strong gains.

“The reported M&A discussion between Cigna and Humana have raised questions about whether Humana itself is concerned about its own growth outlook,” BofA analysts wrote in a note to clients. “We see Humana walking away from a deal as validation of the core growth story ahead.”  

Cantor Fitzgerald analyst Sarah James thinks health insurers are well positioned to navigate challenges like higher patient medical costs and Medicare reimbursement changes next year. She also sees a buying opportunity if there are pullbacks amid heated election year rhetoric about health insurance.

“When you see the multiple compression around election cycles is when you want to put incremental investments or money to work in the sector, because it’s very rare that anything they talk about during their stump speeches, actually pans out,” said James. 

Shares of medical device makers were among the biggest losers this year, as investors predicted the surge in popularity of obesity medications, known as GLP-1 receptor agonists, would cut demand for things like diabetes management, knee replacements and bariatric surgery, said E-Squared health portfolio manager Les Funtleyder.

“Just because there was a lot of concern that GLPs are going to, you know, eliminate all procedures all the time. And that’s not going to happen. That’ll be proven next year,” said Funtleyder. “I think medical devices do best next year.”

There are signs the sector may have bottomed in October. The iShares Medical Devices ETF has surged more than 15% over the last two months. Two of the sector’s biggest gainers were insulin pump maker Insulet and Dexcom, which makes continuous glucose monitoring devices known as CGMs.

While both stocks have gained more than 40% in two months, analysts at Leerink Partners raised their price target on Insulet to $270 from $231 and boosted their target on Dexcom to $144 from $128. Prescriptions for diabetes devices remain strong, Leerink said in a note to clients.  

The diabetes players also have new products on the horizon which could fuel fresh gains next year, said BTIG analyst Marie Thibault.

“We think investors are already looking toward the anticipated launch of a 15-day sensor for type 2 diabetes non-insulin patients in Summer 2024,” Thibault wrote in a research note, adding that rival CGM maker Abbott Laboratories is also expected to gain approval for its new glucose wearable in the new year.

The beaten-down biotech sector has wiped out its losses for the year during this month’s rally, with the SPDR S&P Biotech ETF rebounding more than 28% from its October low.

RBC analyst Brian Abrahams sees the momentum continuing in 2024, fueled in part by the run-up in the GLP-1 drugmakers like Eli Lilly and Novo Nordisk, which has left them flush with cash.

“The biotech sector may benefit more and be less overshadowed in the coming year as we potentially see GLP-1 cash flows catalyze more M&A, and biotech efforts to improve upon some of the shortcomings of the leading GLP-1 agents emerge,” Abrahams wrote in a client note.

Smaller biotech firms faced a cash crunch as the Federal Reserve raised interest rates over the last year, making it tougher for them to access funding and invest in capital expenditures. That had a negative impact on life science tools, but a number of investors see the picture improving next year.

“We don’t think rates are going to go much higher if at all from here, and that eases the pressure on high-valuation growth stocks going forward,” Advisor Capital Management portfolio manager JoAnne Feeney told CNBC. “And we think it takes the pressure off a lot of life sciences tools companies that were really hurt by the funding challenges of high interest rates. We think that starts to ease.”

Analysts at Goldman Sachs see life science tools posting stronger gains than the overall health sector next year, after two years of declining sales growth. “We look for a stabilization and ultimately a resumption of an upward revenue and earnings revision cycle which should allow the sector to show absolute outperformance vs the market,” they wrote in a note to clients.

Goldman’s top tools picks for 2024 are Thermo Fisher, Avantor and Qiagen.