The health care sector has been beaten up since the pandemic, but technological innovation, aging demographics and a growing global middle class could spur a rebound.sasirin pamai/iStockPhoto / Getty Images
The health care sector has been a place for capital to languish in recent years.
The highly diverse sector has been marked by uneven performance with investors often crowding into a select few firms – notably large pharmaceutical makers with patented obesity drugs.
Meanwhile, companies behind new and innovative therapies or technologies have generated only waning interest, often seeing share prices spike followed by dramatic drops. All of that can leave a bad taste in investors’ mouths, diminishing their appetite for the high-risk, high-reward sector.
“Investors have just been apathetic about the sector,” says Eden Rahim, portfolio manager at Next Edge Capital Corp. in Toronto, at which he manages Next Edge BioTech Life Sciences Fund, which is down about 20 per cent (as of Dec. 31) since its inception in January, 2023.
However, Mr. Rahim says investors will eventually recognize “a secular tailwind associated with tremendous technological innovation,” with aging demographics and a growing global middle class as other potential drivers.
This potential aside, the sector has largely been beaten up post-COVID-19. The S&P 500 Health Care Index has been flat over the past one-year and three-year periods. Over 10 years, the index has had an annualized return of about 7 per cent compared with roughly 11 per cent for the S&P 500.
Biotech has lagged even more. The S&P Biotechnology Select Industry Index has returned about 3 per cent annually over 10 years. In Canada, the subsector has fared much worse; the S&P/TSX Venture Health Care Index is down by more than 6 per cent annually over the past decade, although it returned about 22 per cent over the past year.
Yet, biotech may have the most upside in the health care sector, says Shibo Gu, research analyst with Forstrong Global Asset Management Inc. in Toronto.
“With signs of earnings stabilizing and relatively cheap valuations, we believe biotech is a good target,” he says.
Mr. Gu points to the potential for more mergers and acquisitions, building on a longstanding trend of big pharma buying up-and-coming drug developers.
“Facing upcoming patent expirations,” he says, large drug companies “are under pressure to replenish their pipelines.”
Biotech may be the most downtrodden area, but the health care sector, overall, is recovering from a post-pandemic “hangover,” says Marshall Gordon, senior research analyst covering health care with ClearBridge Investments, part of Franklin Templeton Investments, in New York.
That includes large-caps such as Thermo Fisher Scientific Inc. TMO-N, a provider of COVID-19 test and vaccine development solutions. Its share price peaked during the pandemic and then lost about 30 per cent of its value by fall 2023. Although its price has begun to rebound, like so many other companies in the sector, investors remain cautious.
“Since November, there has been added uncertainty about regulation,” Mr. Gordon says.
Insurers and pharmacy benefit managers face a new administration under president-elect Donald Trump and a Congress focused on bringing drug costs down. They may also seek to rein in insurers’ coverage policies, especially in the aftermath of the murder of Brian Thompson, chief executive officer of UnitedHealthcare, which has a large footprint in both subsectors.
Furthermore, investors worry about the impact of Mr. Trump’s pick for secretary of health and human services, Robert F. Kennedy Jr., who is a vaccine skeptic.
“There are some big companies with very large vaccine sales that could be affected,” Mr. Gordon notes.
The new administration also inspired optimism. Investors are expecting deregulation and tax cuts, which could come as the sector embarks on an exciting period of innovation, he adds.
“We’ve seen, for example, a new antipsychotic drug approved last year – the first in decades – that has well more than US$5-billion worth of sales potential.”
The new drug, Cobenfy, manufactured by Bristol Myers Squibb Co. BMY-N, represents a vanguard of new therapies entering the marketplace.
Another driver is artificial intelligence. Generative AI captured investors’ imagination in the technology sector, pushing big tech companies to frothy heights.
AI is also expected to play a transformational role in drug development, “fostering a pro-innovation environment, enabling breakthroughs in weight-loss drugs, diabetes treatments, oncology and other critical areas,” Mr. Gu says.
Much of that potential growth isn’t priced in by investors, says Mr. Rahim, who follows more than 1,200 biotech stocks – about one-third of which trade below cash value. “Valuations are at multi-decade lows.”
He further points to companies such as Crispr Therapeutics AG CRSP-Q that use CRISPR (clustered regularly interspaced short palindromic repeats) gene editing technology. It has developed an approved medication for sickle cell anemia.
Others have equally promising therapies, but many advances outside obesity drugs have attracted less traction from investors, Mr. Rahim says.
Among them is Legend Biotech Corp. LEGN-Q with its multiple myeloma therapy approved for use in the U.S. in April. Its share price is trading well below its 2023 peak, he adds.
Canada’s market also has a few promising, overlooked companies that have survived a decades-long bear market, which witnessed the rise and fall of firms such as Biovail Corp.
For example, Montreal-based Theratechnologies Inc. TH-T has two commercialized HIV therapies. “You can see the market is now starting to reward companies like this,” Mr. Rahim says.
Its share price is up significantly in the past six months, although down from of more than $60 its peak in the early 2000s .
Even share prices of GLP-1 drug makers Eli Lilly and Co. LLY-N, behind Zepbound, and Novo Nordisk A/S NVO-N, Ozempic’s manufacturer, are down from their highs a few months ago. Both had previously garnered most of investors’ attention, leading to challenges for competing med-tech companies and the “great variance of returns” in the sector, Mr. Gordon says.
“Some stocks do really well and some really poorly,” he says, often at the expense of one another.
Although the sector may have better days ahead, risks remain. That includes the potential for higher interest rates if inflation remains problematic, Mr. Rahim says.
Yet, he adds the health care sector, particularly biotech, appears poised for strong growth. “There will come a point when investors wake up and realize the remarkable innovations that have happened in technology are also happening in health care.”