Published Date: December 05, 2024 | Author: Matt Renna, Managing Partner, Westfield Capital Management
2024 has not been friendly to healthcare investors, to say the least. A confluence of events and sentiment shifts has led to deeply oversold conditions across many subsectors, extreme levels of ETF outflows, and a down-weighting of the sector as a percentage of the S&P to 24-year lows.
But all is not lost. Amidst the carnage, we see a very compelling setup for 2025, with many high-quality structural winners now trading at multiples we haven’t seen in the last decade. Additionally, we see biopharma assets across the cap chain that have made major strides on the clinical and regulatory fronts but have seen their market caps stagnate or, in some cases, actually decline meaningfully. Before diving into the reasons for our forward optimism, let’s discuss the factors that have brought us to this place of opportunity.
The year actually started on solid footing, as the JP Morgan Healthcare Conference was extremely well-attended and brought an upbeat tone from many management teams. Biotech built upon the 4Q23 M&A-driven rally to reach fresh 52-week highs shortly thereafter, and the attractiveness of large therapeutic markets like obesity helped propel big pharma to all-time-high valuations. This euphoria was short-lived, however, as biotech soon suffered from a lack of sustained M&A momentum, FDA staffing shortages that drove delays in applications, a more balanced view on interest rate cuts, and general relative apathy toward other areas of the market, including tech, financials, industrials, and energy. Simply put, it was tough to compete for generalist capital when other sectors were performing with such ease and momentum.
To make matters worse, healthcare fared poorly during the 2Q and 3Q earnings seasons, with the largest number of surprise misses and guidance reductions in recent memory. This, coupled with U.S. election uncertainty, drove continued outflows in the space, which seem to have reached a fever pitch following the recent nomination of more nontraditional establishment players for key roles in the Trump healthcare administration.
It is worth noting that the broader healthcare indices have been misleading all year and do not accurately depict how poorly the underlying constituents fared. Essentially, it was the narrowest healthcare market we can recall, with a clear delineation between haves and have-nots across the cap spectrum. This narrowness created more demand for winners and less for losers—a vicious cycle that led to significant crowding in preferred trades and heightened volatility when any crowded names fell short of expectations and began to unwind. The culmination of all these crosscurrents has brought us to this deeply oversold condition as we approach year-end, where even previous pockets of excess valuation have subsided.
Despite what feels like a perpetual malaise toward the healthcare ecosystem, we are incrementally more constructive on the opportunity from both a relative and absolute standpoint. While there is some uncertainty surrounding the new administration’s stance on the FDA, CMS, and HHS, we largely believe much of the status quo at these agencies will remain intact. Furthermore, the notion that a few individuals could drive meaningful disruption appears overblown. Key factors often cited by healthcare bulls—including innovation, value-based care, robust demographics, and M&A—remain strong potential drivers for equities, and perhaps even more so in the near term.
Regarding innovation, we are focused on long-duration assets that provide true advancements in treatment paradigms, adding value to all stakeholders. Within this subsector, we are finding opportunities across the development spectrum, including fully derisked and commercial-stage companies trading at significant discounts to intrinsic value in opinion, which we expect to unlock in the coming year. With the potential for a more lenient FTC backdrop, rising cash balances at larger pharma and biotech companies, and compelling valuations in biotech, we anticipate an uptick in M&A activity in 2025. We are also constructive on medical technology and equipment—a group likely to be perceived as insulated from political headwinds in 2025. As always, our hunt within the healthcare services space remains selective, but we see a few very compelling structural winners positioned well for multiple expansion in the coming year.
For professional investors only. When you invest in ETFs your capital is at risk.
Harbor Health Care UCITS ETF (WELL) aims to provide exposure to the secular growth and innovation of the U.S. healthcare system, while achieving alpha relative to the broader healthcare sector by investing in quality businesses with differentiated products, technologies, and services which meet the team’s disciplined valuation criteria.
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