Market commentary, December 20, 2023

Are healthcare stocks poised for a comeback?

Hardly any investors have taken notice of the upside potential that the healthcare sector now offers. History has shown, however, that novel drugs and medical technology advances will always be a decisive factor in shaping the sector’s market fortunes. Another factor is the currently low valuation of healthcare stocks. In his investment outlook for 2024, Cyrill Zimmermann, a member of Bellevue Asset Management’s Executive Board and Head of Healthcare Funds & Mandates, explains why it is probably only a matter of time before healthcare stocks are rediscovered by the wider investment community.

 The general performance of healthcare stocks was disappointing in 2023. For some companies whose sales surged during the pandemic, this simply reflects a post-pandemic normalization of growth. Leading diagnostics companies such as Roche and Thermo Fisher were clearly exposed to these shifting market currents. The significant increase in market interest rates was another major challenge, especially for fast-growing companies, because that also increased the discount rate applied to obtain the present value of their future cash flows. Biotechnology companies and companies developing and marketing digital health devices and services were affected the most by rising interest rates. Meanwhile companies that are not yet turning a profit found themselves confronted with higher equity risk premiums.

Innovative power is intact

But the sector’s innovation power is as strong as ever. Recent regulatory approval decisions in oncology, gene therapy and in the treatment of Alzheimer’s and metabolic disorders are impressive proof of this. For example, the world’s first drug based on genome-editing technology, also known as "gene scissors”, was approved in the UK. In this procedure, defective fragments in the genome are cut out and replaced with new DNA building blocks, which are then integrated into the DNA strand using the body’s own cellular DNA repair processes. This treatment called Casgevy could supplant stem cell transplants as the standard-of-care treatment for two rare inherited blood diseases. Casgevy was developed by Crispr Therapeutics and Vertex Pharmaceuticals.

But this successful breakthrough did not register with most investors. About the only news reports from the healthcare sector that caught the attention of the wider investment community concerned novel drugs for people with diabetes and obesity. The clinical trial data presented for these drugs was impressive. Shares of Eli Lilly and Novo Nordisk, both leading pharmaceutical companies in this field, surged as a result. This reflects the tremendous market potential for diabetes and obesity treatments. About 40% of the world’s population is obese. And in the US, a whopping 21% of total spending on healthcare can be traced to obesity-related treatment. In view of this dynamic situation, Bellevue Asset Management launched Bellevue Obesity Solutions in November, a fund that invests in the most attractive companies across the entire value chain for obesity treatment and management.

The recent positive news about new treatment options for obesity also had a downside, though. Investors worried that these breakthroughs could have negative effects on the business of medical technology companies. The assumption here is that the strong sales growth of monitoring systems in diabetes or of hip replacements as a result of excess weight, for example, could be jeopardized by the new weight-loss pills. We believe medtech growth prospects are still intact. One reason for this is because diabetes increases with age and it is not caused by obesity alone. Moreover, obese patients with diabetes who lose weight will still require optimal insulin management. 

Turning to the medtech sector as a whole, some companies have already given a positive outlook for 2024, which supports our scenario of an ongoing upturn in procedure volumes in 2024. The medtech sector’s good sales growth will be sustained by the approval and launch of relevant new products. Examples here are Abbott’s TriClip, AVEIR and Libre products, Boston Scientific’s Farapulse PFA system and the next generation Da Vinci robotic surgery system from Intuitive Surgical. The medtech industry continues to exhibit strong pricing power, raising prices by a low single-digit percentage amount, and the negative effects of supply chain disruptions are subsiding, which spells additional margin improvement potential ahead.

Artificial intelligence a positive trigger

Artificial intelligence (AI) is a game-changer in the healthcare space. Healthcare will clearly benefit from the technological quantum leap made possible by the release of ChatGPT. AI could become a core element of digital medicine. We see tremendous potential behind the accelerating pace of healthcare digitization, leading to improvements in diagnostics, treatment quality and administrative efficiency. In addition, faster R&D processes and more targeted delivery of therapeutics will open the door to novel treatment methods.

According to Amgen, the largest biotechnology company in the world, the use of AI will lower its R&D spending by about 20%. AI can be used to identify and filter out specific patterns in clinical trials, especially during Phase II testing. This, in turn, will allow modifications in trial designs that reduce the risk of failure while speeding up the clinical trial process.

Conclusions

Innovation in the healthcare sector is as strong as ever. That is plain to see in the recent breakthrough treatments for obesity and diabetes, in the new drug approvals for Alzheimer’s and cancer therapies, and in the launch of minimally invasive heart valve replacement systems. And yet the valuation of the entire healthcare sector is at historically low levels, both in industrialized countries and in Asia-Pacific. This is likely to stimulate M&A activity, especially in the biotech sector, a favorite hunting ground for pharmaceutical companies seeking external sources of innovation to strengthen their product portfolios or to shield themselves from patent cliffs by acquiring promising third-party products.

Meanwhile the healthcare sector should get some tailwind from interest rate cuts in the US, widespread investor repositioning, and the generally good prospects for non-cyclical sectors as clouds gather over the world economy. So it’s probably only a matter of time before the sector starts trending higher again. Mid- and small-cap segments experienced the heaviest selling during the past year and they are projected to have most catch-up potential.

Author: Dr. Cyrill Zimmermann
Dr. Cyrill Zimmermann is Head of Healthcare Funds & Mandates and a member of the Executive Board of Bellevue Asset Management. He founded Adamant Biomedical Investments in 2001 and was the investment boutique’s CEO until its acquisition by Bellevue in 2014. Cyrill Zimmermann holds a Ph.D. in economics from the University of Zurich.

Contact
Bellevue Asset Management AG, Seestrasse 16 / P.O. Box, CH-8700 Küsnacht/Zurich,
Tanja Chicherio, tel. +41 44 267 67 09, tch@bellevue.ch

www.bellevue.ch

Bellevue – Excellence in Specialty Investments 
Bellevue is a specialized asset manager listed on the SIX Swiss Exchange with core competencies covering healthcare strategies, entrepreneur strategies, alternative and traditional investment strategies. Established in 1993, Bellevue, a House of Investment Ideas staffed by 100 professionals, generates attractive investment returns and creates value added for clients and shareholders alike. Bellevue managed assets of CHF 8.1 bn at the end of June 2023.

Disclaimer: This document is neither directed to, nor intended for distribution or use by, any person or entity who is a citizen or resident of any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. The information and data presented in this document are not to be considered as an offer to buy or sell or an invitation to subscribe any securities or financial instruments. The information, opinions and estimates contained in this document reflect a judgment at the original date of release and are subject to change without notice. Liability for the accuracy or completeness of all information in this document is expressly disclaimed. This information does not take into account the specific or future investment objectives, the financial or tax situation or the particular needs of any specific recipient This document does not constitute independent investment research. Interested investors should always seek professional advice before making an investment decision. The information in this document is provided without any guarantees or warranties, for information purposes only, and is intended only for the personal use of the recipient. Every investment involves some risk, especially with regard to of fluctuations in value and return. Investments in foreign currency involve the additional risk that a foreign currency might lose value against an investor’s reference currency. This document does not reflect all possible risk factors associated with an investment in the aforementioned securities or financial instruments. Historical performance data and financial market scenarios are no guarantee or indicator of current and future performance. The performance data are calculated without taking account of commissions and costs that result from subscriptions and redemptions. Commissions and costs adversely affect performance. Financial transactions should only be carried out after thorough study of the current prospectus and are only valid on the basis of/or/and are subject to the terms given in the most recently published prospectus and annual or semi-annual report. Bellevue Funds (Lux) SICAV is admitted for public distribution in Switzerland. Representative in Switzerland: Waystone Fund Services (Switzerland) SA, Avenue Villamont 17, CH-1005 Lausanne. Paying agent in Switzerland: DZ PRIVATBANK (Schweiz) AG, Münsterhof 12, P.O. Box, CH-8022 Zurich. Bellevue Funds (Lux) SICAV is admitted for public distribution in Austria. Paying and information agent: Zeidler Legal Process Outsourcing Ltd., SouthPoint, Herbert House, Harmony Row, Grand Canal Dock, Dublin 2, Ireland. The Bellevue Funds (Lux) SICAV is admitted for public distribution in Germany. Information agent: Zeidler Legal Process Outsourcing Ltd., SouthPoint, Herbert House, Harmony Row, Grand Canal Dock, Dublin 2, Ireland. Bellevue Funds (Lux) SICAV is registered in the CNMV registry of foreign collective investment schemes distributed in Spain, under registration number 938. Representative: atl Capital, Calle de Montalbán 9, ES-28014 Madrid. Prospectus, Key Investor Information Document (“KIID”), the articles of association as well as the annual and semi-annual reports of the Bellevue Funds under Luxembourg law are available free of charge from the above mentioned representative, paying, facilities and information agents as well as from Bellevue Asset Management AG, Seestrasse 16, CH-8700 Küsnacht. With respect to fund units distributed in or from Switzerland, the place of performance and jurisdiction is established at the registered office of the representative.