Source: Zhitong Finance Author: Wei Haoming
Analysts are optimistic about the performance of the US medical technology sector next year.
Hardly anyone on Wall Street anticipated that the fervor for weight loss treatments would make Lilly (LLY.US) and Novo Nordisk (NVO.US) the two pharmaceutical companies with the highest market capitalization. At the beginning of this year, analysts expected Lilly's stock price to rise about 8% this year, less than half of Wall Street's expectations for the market. Even the most optimistic forecast — Morgan Stanley analyst Terence Flynn only anticipates a 20% upside. In contrast, the company's stock price has soared by more than 50% so far this year, increasing its market value by nearly $200 billion.
Other health-care stocks, however, performed quite the opposite. Medical technology companies, including PODD.US (PODD.US) and Bax.US (BAX.US), were hit hard because investors saw Novo Nordisk's weight loss drugs Ozempic and Wegovy, as well as Eli Lilly's weight loss drug competitors Mounjaro and Zepbound eating up demand for everything from insulin pumps to knee surgery. Coupled with the imminent record declines of Pfizer (PFE.US) and Moderna (MRNA.US), the US healthcare industry experienced consecutive annual losses for the first time in more than 20 years.
Next year, political risks and the development of diet pills will keep investors alert. Mizuho Securities strategist Jared Holz said: “This is a difficult background. In my opinion, not many stocks are trading below their fair price. Most individual stocks in the industry seem to be reasonably priced.”
As healthcare stocks lagged behind the S&P 500 index, they recorded their worst performance in nearly 25 years. As soon as possible, some investors expect healthcare stocks to recover their lost ground as the diet drug hype cools down. Holz also said that as device makers bounce back at least 30% from their lows, “the post-apocalyptic scenario is no longer there.”
Shams Afzal, portfolio manager at investment consulting firm Carnegie Investment Counsel, said that the pricing of obesity drug manufacturers is perfect. Eli Lilly's stock is expected to have a price-earnings ratio of approximately 46 times. Afzal said, “This is still largely a stock picker's market. If the overall market continues to rise, healthcare will bear a fair share of the burden to make up for losses in 2023.”
Biotech and medical equipment stocks are expected to rebound next year
Some people think there is room for further recovery in medical device stocks and biotechnology stocks. Baird healthcare expert Mike Perrone said, “These two segments are most likely to improve from current sluggish levels. They want to strengthen their defenses if the economy slows down, and healthcare is a good defense department.” The highest interest rates in decades and a series of poor clinical trial data have crushed high-risk, high-return biotech companies, making some of the industry's risks clear. Last week, the Federal Reserve hinted that interest rates would be cut several times next year, erasing the much-publicized SPDR SP biotech ETF's decline since this year. Over the past two years, this has only waited for weighted ETFs to drop by more than 20% per year.
Bank of America analysts prioritized BridgeBio Pharma (BBIO.US) and Rocket Pharmaceuticals (RCKT.US). Afzal, on the other hand, is optimistic about the future of Syk.US (SYK.US) and ABT.US (ABT.US) because the aging population is driving the use of a range of medical devices.
The challenges of macroeconomic headwinds are putting pressure on laboratory tools and service providers. Device manufacturers that sell laboratory equipment and supplies to drug developers are also facing a slowdown in biopharmaceutical company spending.
Goldman Sachs Group analysts, led by Asad Haider, predict that the life science tools sector will perform well next year, while health insurance and dental stocks will face a harsher background. They expect bioprocessor company Avantor (AVTR.US) to be one of the first tool companies to begin recovery.
Major pharmaceutical companies may lose next year
Both strategists and portfolio managers are advising to steer clear of stocks from big pharma companies. Although the diet pills market is expected to eventually reach $100 billion, many investors expect these pharmaceutical companies to lag behind by 2024. The question remains whether they will be able to meet the huge demand for these drugs and gain broad commercial coverage. “If they can't deliver on execution, then it doesn't matter what the target market is,” Afzal said. Now is the time to show management's ability.”
The US government's plan to negotiate the price of prescription drugs also threatens the future profits of major pharmaceutical companies. There is also increasing pressure to find new revenue streams before the patents for the best-selling drugs are about to expire.
This should rekindle the merger and acquisition boom. According to agency data, this year is consistent with 2022, and 16 deals of $1 billion or more were announced or completed in the first nine months of 2023, far below the peak of 2015. But the huge deal between Pfizer and Amgen (AMGN.US) removed regulatory barriers and sparked optimism. Lis Agosto, a senior healthcare analyst at ETF firm Global X, said: “We have seen that some of the larger acquisitions were completed with minimal concessions or fewer concessions than expected, which indicates a possible rebound in the market.”