Sign up for timely perspectives delivered to your inbox.
2024 Healthcare Outlook: Portfolio Manager Andy Acker explains why, after underperforming in 2023, the healthcare sector could be well positioned for the year ahead.
Alternatively, watch a video recording of the podcast:
Carolyn Bigda: Welcome to this special series of Research in Action, where we talk about the outlook for the major economic sectors and investment implications for 2024. We’re your hosts, Carolyn Bigda…
Matt Peron: …and I’m Matt Peron, Director of Research.
Bigda: And in this episode we are joined by Andy Acker. He leads the Healthcare Sector Team and he’s also a portfolio manager on several of our healthcare and biotech strategies. Andy, welcome to the podcast.
Andy Acker: Good to be with you.
Bigda: So, the big story in healthcare in 2023 was, of all things, weight loss. You had a new class of drugs called GLP-1 agonists. They’ve delivered some pretty impressive weight loss results in patients. They’re showing signals for other benefits like a reduction in heart disease, and they’ve also caused some volatility in this sector. So, could you give us an update on where that category of drugs is going, and what we see ahead in 2024 for them?
Acker: Sure. It’s been hard to look at the news without hearing something about these new therapies. And they have been really a game changer. We think this could be the biggest opportunity that we’ve ever seen in the healthcare sector. To give you a sense, these products are already annualizing at over $30 billion a year, and yet we’re only about 5% penetrated in the U.S. We have maybe four or five million people in the U.S. out of 100 million people that are overweight or obese. So, we’re in the very, very early innings. And we think this is going to be the next $100 billion market in healthcare. And not that far away, before the end of the decade, I think we’ll be there.
Now, why is there so much excitement about these therapies? The main reason is these are really a breakthrough in terms of the degree of weight loss that they can achieve. So, what’s interesting is, these GLP-1 drugs – or incretins, which are gut hormones, which essentially make you feel full – have actually been around for about 18 years, since 2005. But the old ones were not that effective. You had to take injections twice a day. Now, we can get injections once a week, and we’re getting 15% to 20% weight loss. So, these are unprecedented levels of weight loss that can be life-changing for patients.
And importantly, we believe with that kind of weight loss, that could also improve outcomes, reduce the other consequences of being very overweight or having active inflammation. And we just learned very recently that these drugs do actually reduce the risk of heart attacks and strokes and death. We’ve also learned – and we’ll get more data in 2024 – on their ability to reduce the risk of kidney disease. We’re going to see if they reduce the risk of liver disease, diabetes. So, these are having far-reaching consequences. And they’re advancing.
Right now, there’s still a capacity constraint. We expect in 2024 the capacity continues to increase, so, more and more patients will get access to these medicines. And we’re going to see some news from potential competitors or other players in the market. We’re going to see everything from early data on new oral therapies. Wouldn’t it be nice if we had an option of taking these as one pill once a day, instead of a weekly injection? We’re also going to see less frequent ones. So, we’ll see ones that maybe could be given once a month instead of once a week.
So, this is going to be a field that will continue to evolve. We’re going to continue to see more data on other impacts. In fact, the two leading companies are sponsoring 36 pivotal studies that will be reading out over the next five years. So, we’re going to learn a lot more about these medicines, their other benefits. That, we think, over time will lead to improved reimbursement, and we’re going to see continued capacity increases that make these medicines more available. So, tremendous growth engine, we think, coming from these new weight-loss therapies.
Peron: So, that’s been the big story, obviously, in healthcare. But another story is the fact that the sector’s really struggled this year, just across the board, really. What’s going on?
Acker: Yes, so, I think it’s been a couple of factors. And the first one, it’s hard to think about healthcare without thinking about COVID. And, of course, healthcare and biotech we’re on the frontlines of fighting that disease. When it came out, fortunately, we were able to develop new vaccines in 10 months instead of 10 years, and that probably saved millions of lives. And so, we’ve had tens-of-billions-of-dollars of sales of products for fighting the pandemic, fighting COVID-19.
But this was a year, really, where the COVID party turned into the COVID hangover. Last year, we had $90 billion of sales of products for COVID-19, everything from treatments to vaccines to diagnostics. And this is the year where the pandemic ended, the public health emergency ended. And so, companies have been suffering from challenging comparables in terms of this year; not that many people are getting vaccines and treatments for COVID. The infection rates have gone down. It’s not that it’s gone, but it’s substantially lower than it was.
And so, you’re seeing that weighing almost on the entire healthcare sector. Companies like Pfizer have seen their sales go from $100 billion to about $60 billion. Moderna, their vaccine sales have declined. Abbott, they’ve seen declines of their diagnostic products. In the most recent quarter, some of these companies are reporting double-digit growth in their core business but 80% declines of their COVID business. And that has weighed on the entire sector, and so, we’re actually seeing negative earnings growth and revenue growth for the entire healthcare sector this year. That’s actually a very rare event.
And then, you combine that with the fact that we came into 2023 expecting a recession. There was a view that we were going to have recession this year, so, everyone was defensively positioned in the healthcare sector, and healthcare hasn’t felt that defensive this year. And meanwhile, there’s been a lot of excitement about AI [artificial intelligence] and technology. So, we’ve seen a big shift out of healthcare into other sectors.
Now, if we look forward, though, we always, as investors, we try to look forward and not backward, this has been one of the worst years on a relative basis for the healthcare sector. But looking forward, the valuations in the sector are depressed. The level of innovation, we think – and hopefully, we can get to that in a minute – but level of innovation’s higher than ever. We’re seeing more new medicines getting approved than ever before.
And yet, the valuations are low, and as we go into 2024, we see the potential for a reset where we see earnings accelerating off of the depressed levels of this year. And so, revenue and earnings, we think, for the sector will return more to normalized levels, where we see this kind of structural growth in the industry.
And we could have, at the same time healthcare’s accelerating, there’s still the potential for an economic slowdown or recession that could impact the rest of the market and result in decelerating growth. So, we think that actually sets up quite well on a look-forward basis as we look into 2024 for the healthcare and biotech sectors.
Peron: So, the setup does sound pretty interesting. Do you worry at all about the presidential election cycle? Healthcare’s typically challenged during that time.
Acker: Yes, I think that’s been another overhang. Whenever there’s an election cycle, people say that’s got to be bad for healthcare. What’s interesting, at least so far, the two leading presidential candidates have both been president already. So, they can say whatever they want, but they each had four years to do whatever they wanted. And we’ve also gotten a piece of legislation that has been passed called the IRA, or the Inflation Reduction Act. So, we already know what that looks like.
So, I think maybe there could be some rhetoric, but the reality is, we have a law in place already and now people are trying to figure out the impact of that. And there’s sort of pros and cons there, but I don’t think we’re going to see anything materially different than what we already have at this point.
Bigda: What about if we just zoomed in on one area, though, of healthcare, which is biotech. Unfortunately, it’s been in a bear market for going on almost three years now. What’s happened there, and what might turn it around a little bit?
Acker: So, you’re right. So, biotech has been down. Actually, if we look at the broad S&P Select [Biotechnology] Index, it’s been down now three years in a row; double digits three years in a row. Now, the last time biotech stocks were down three years in a row was 1992 to 1994. And in the following year, biotech stocks were up 60%.
So, we’re seeing, it feels like a depression right now in the biotech industry when you look at the stocks. And what’s driven that? Part of it is similar to what happened with healthcare. You had a lot of excitement after the progress we made against COVID-19; the new vaccines that were developed so quickly and were so effective, and that brought a lot of excitement and money into the biotech sector. And many companies got funded that we thought probably should never have been funded. So, there were a lot of companies with relatively early and/or relatively weak scientific basis that were valued at billions of dollars. And that probably never should’ve happened because people forgot about our 90/90 rule – the fact that 90% of the new medicines in development will never make it all the way to the market, and then, even if they make it, the consensus estimates are wrong 90% of the time.
And a lot of those companies have missed expectations. There’s been a lot of clinical disappointments from companies that got funded that probably never should have. And so, for the last couple of years, there’s been a shakeout. A lot of those companies are going away. The companies that were depending on capital markets for financing are really struggling. A lot of those are now being merged away through reverse mergers, so you have more promising technology companies that are private, that are merging in the public sale.
So, we’ve been seeing that going away over time, and that process kind of continues. But meanwhile, under the surface, there’s been actual real innovation that we think is extremely exciting. In fact, 2023 will be the biggest year ever from new product approvals that we’ve ever seen. We’ve already had 59 new medicines approved and dozens more still pending. So, this will be the biggest year ever for new product approvals. You wouldn’t know it when you look at the stock market.
And typically, when these products get approved, they drive a new product cycle that can last for a decade or longer. And so, we think we’re still in the early innings of a new growth cycle in biotech that’s not really being recognized by the current market conditions.
Bigda: What do you see coming down the pike in terms of innovation and new drug launches that you’re keeping an eye on and you’re most excited about?
Acker: So, I think cancer is one of those areas that’s seeing tremendous change. For 70 years, we’ve been using chemotherapy drugs that we all know about that are effective, but they have a lot of side effects. And what we’re doing now is finding more precise ways of giving chemotherapy. So, one of these are called antibody drug conjugates. So, instead of giving chemotherapy systemically to a patient where it goes all around your body, what if we could target it, attach those chemotherapy molecules to a targeted antibody and deliver it directly to cancer cells?
And we’re starting to get these therapies, and they’re resulting in dramatic benefits for patients. One of these therapies improved overall survival for women with ovarian cancer by 33%. We’ve had another one for the treatment of bladder cancer that is improving overall survival by about 100%, essentially doubling overall survival. When you combine that with our immuno-oncology medicines that also help to target, basically unlock the power of the immune system to attack and kill cancer cells.
We have new cell-based therapies, what are called CAR T therapies. And a lot of these would’ve seemed like science fiction 10 years ago, but we can take the cells of a patient out of their body, reprogram them, essentially genetically engineer them to find cancer cells, reinfuse them back into a patient. One of these therapies in June of 2023 at the American Society of Clinical Oncology conference showed that they could reduce the risk of progression or death by 75%, so essentially quadrupling your overall survival without your disease progressing. So, we’re seeing enormous benefits. And even better, these therapies are generally better tolerated than the old therapies we were using. So, we’re seeing a continued transition to new ways of treating oncology.
We’re also seeing advances, continued advances in genetic-based medicines. Everything from gene therapies to gene editing to mRNA therapies. These mRNA therapies that were so great for COVID are being developed for other respiratory diseases, so we’re getting further vaccines there. We’re also getting vaccines that could be used for cancer, as well. And so, we’re seeing really tremendous progress in terms of, how do we treat human disease?
Another one – we already talked about obesity – is Alzheimer’s. We have the first disease- modifying treatments that are being launched now. We have one approved already, another one coming in 2024, and we’re trying to further improve upon those.
So, really tremendous clinical progress in terms of addressing unmet medical needs with products that we think can change the practice of medicine. But some of these companies are being really completely missed, we think, by the market, their potential. So, that’s what gets us really excited about investing in the sector.
Bigda: And do you think that innovation can help turn around the earnings and revenue trajectory for the sector?
Acker: Yes. I think once we get rid of this COVID overhang, which I think is largely out of these companies now, there’s maybe a little bit left. But as that comes out, and then the core growth of addressing unmet needs, that will drive an acceleration of growth, we believe, for the entire sector and could help it recover.
Peron: Great setup.
Bigda: Yes, let’s hope that we can put COVID further and further behind us, for everyone and the healthcare sector. Thank you so much, Andy, for being here.
Acker: Yes, all right. Great to be here. Thank you.
Concentrated investments in a single sector, industry or region will be more susceptible to factors affecting that group and may be more volatile than less concentrated investments or the market as a whole.
Health care industries are subject to government regulation and reimbursement rates, as well as government approval of products and services, which could have a significant effect on price and availability, and can be significantly affected by rapid obsolescence and patent expirations.
S&P Biotechnology Select Industry Index comprises stocks in the S&P Total Market Index that are classified in the GICS® Biotechnology sub-industry.