After Covid distortions, outlook for healthcare investing looks bright

Recent mergers and acquisitions in the pharmaceutical and biotech sector may indicate a reawakening of the healthcare sector, says Jennifer Martin, vice-president, global equities at T. Rowe Price.

She said the industry saw fewer healthcare deals in 2021 and 2022 as it worked through pandemic-related disruptions and rising interest rates weighed on negotiations. Starting in late 2023, however, there were a spate of high-profile acquisitions by the likes of New York-based Bristol-Myers Squibb Co., U.K.-based AstraZeneca plc, and Merck & Co. Inc. and Johnson & Johnson, both based in New Jersey.

“You’ve seen some M&A in large-cap pharma and biotech,” Martin said. “The industry seems to be re-emerging from an activity standpoint. That may be because some of the challenges you saw because of Covid might be resolving.”

Martin said the outlook for healthcare investing seems bright, especially compared to last year when most players struggled.

“2023 was actually a very challenged market environment for the healthcare sector, with the exclusion of [Denmark-based] Novo Nordisk A/S and [Indiana-based] Eli Lilly and Co. If you weren’t in those two stocks and you were in other healthcare names, you probably suffered some volatility — maybe even a drawdown,” she said.

She pointed out that healthcare as a percentage of the S&P is almost at a 10-year low.

“That usually is a good tell for the next 12 to 18 months, that there could be higher hit rates, in terms of improving returns for other companies in that sector,” she said. “And so it’s an area that, in a lot of portfolios that I support, we are either equal weight or slowly becoming overweight.”

Novo Nordisk and Eli Lilly — which led health-care sector returns last year with its breakthrough GLP-1 diabetes and obesity drugs — remain attractive investments in 2024, she said.

Martin said both firms have first-to-market advantages, with long runways for future growth. For one thing, other markets are likely to open up for them — including cardiovascular health, as well as Alzheimer’s and addiction treatment — which will only add to the excitement.

For another, low-cost competitors will find the barriers to entry steep, and both Eli Lilly and Novo Nordisk are investing in expanding capacity.

“They’re both manufacturing these drugs. They don’t outsource it. They’re the direct manufacturers,” she said. “The sheer amount of money that they’ve already invested in capacity, as well as [the cost of] trials will make it very difficult for the incremental drug company to come in. We’ve seen this pattern in cancer drugs. It’s a reason why [Merck & Co.’s] Keytruda has done so well. It’s just so hard to displace it.”

Most importantly, both are working on oral versions of these injected drugs, a development which is expected to come onstream by 2026 and which will probably increase popularity.

“A GP feels much better giving an oral prescription rather than an injectable,” she pointed out.

She said that to be a good investor in healthcare, you must be front footed and a creative thinker.

“You have to think about how big this could be,” she said. “The addressable market just for obese Americans is over 100 million. That’s a population that we [didn’t] have a clinical opportunity to solve for. Now we do.”

Martin said potential losers could be suppliers of alternative treatments for diabetes, obesity and cardiovascular issues, as well as manufacturers of treatment equipment.

“It doesn’t mean [GLP-1s are] going to cure everyone. But if we’re seeing less patients, anyone in that downstream effect will probably have less volume,” she said.

Overall, there are positive signs for healthcare investing as biomedical technology paints a brighter picture for human health and productivity.

“There are a lot of parts of healthcare that we’re really excited about and we’re investing behind in the portfolio,” she said. “Maybe we should all be excited about the future. We’re going to be more productive because of artificial intelligence, and healthier because of artificial endocrines or the GLP-1s.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.