Goldman Sachs spotlighted key healthcare themes to follow in 2023, noting a few days ago in a research note that despite the ongoing macro uncertainty, the micro factors have become increasingly critical for stock selection in the sector. “Notwithstanding the macro environment, we view micro factors as of increased important for selection,” Goldman analyst Asad Haider and the team wrote in the firm’s 2023 outlook for healthcare.
This year, healthcare stocks are on track to outperform the S&P 500 after lagging the benchmark index for three consecutive years, according to analysts.
While the defensive pockets such as drug distributors and managed care led the outperformance, dental, MedTech, SMID biotech, and tools stocks in the growth, cyclical and consumer-facing industries trailed, the team added.
According to Goldman Sachs, key questions in healthcare for next year are the rotation risk to other sectors and how the sector’s outperformance relates to past bull runs lasting more than a year.
“There is a precedent for an extended, multi-year bull run with healthcare outpacing a broader market recovery,” Haider and the team added, pointing to 2011 – 2015, when HC outperformed for four consecutive years.
Based on an analysis of the latest 13Fs, the analysts said that mutual funds have started “carrying a sizable overweight” in healthcare through managed care stocks. And their allocations to large-cap biotech and selected pharma stocks also indicated an increase in recent times.
However, as the market enters 2023, the healthcare sector is valued at a ~4% premium to the S&P 500 compared to a ~16% discount in 2011, Goldman said, adding that the sector’s current valuation is neither cheap nor as expensive as other defensives.
The key 2023 themes Goldman highlighted for stock picking include the trends in the TAMs for obesity and Alzheimer’s, each with a peak sales opportunity of over $30B, and the private COVID/flu market estimated at ~$8B annual sales.
Obesity: In July, Morgan Stanley projected that Eli Lilly (NYSE:LLY) and Novo Nordisk (NVO) (OTCPK:NONOF) will lead the market for weight loss treatments, expected to generate $54B in 2030. However, Goldman argues that the threat to their duopoly will be in focus later in the decade and picks Novo (NVO), Amgen (AMGN), Pfizer (NYSE:PFE), and Altimmune (ALT) as its preferred implementations in the weight loss space. A notable omission is Lilly (LLY) which is advancing its experimental weight loss therapy, tirzepatide, in late-stage development.
The addition of Amgen (AMGN) comes after the pharma giant highlighted the potential of its investigational weight loss therapy AMG 133 early this month, releasing early-stage data from people with obesity and without diabetes.
Alzheimer’s: In Alzheimer’s market, regulatory clearances, pricing, and Medicare coverage will be in focus, Goldman said, as Biogen (BIIB), the firm’s preferred selection in the space, awaits an FDA decision next month on the new Alzheimer’s therapy developed with partner Eisai (OTCPK:ESALF) (OTCPK:ESALY).
Private COVID/Flu market: Meanwhile, the analysts point to Pfizer (PFE) and Moderna (NASDAQ:MRNA) as their preferred implementations in the private COVID/flu market, where they think the annual booster volumes could reach the flu volumes as the virus reaches an endemic period.
The comments follow the Biden administration’s moves to transition the government-led procurement and distribution of COVID-19 vaccines and therapeutics to the commercial market.
Biosimilar market: Goldman also picks Amgen (AMGN), CVS Health (CVS), Elevance Health (ELV), Humana (HUM), and UnitedHealth Group (UNH) as its preferred implementations in an evolving U.S. biosimilar market where AbbVie’s (NYSE:ABBV) Humira, is set to lose U.S. exclusivity next year.
The analysts opined that the shift in the competitive landscape for Humira, the biggest-selling drug in U.S. history, will be “unprecedented” as the patent cliff paves the way for copycats in 2023. Indicating the potential for significant generic-like savings, they reasoned that there was no point in history where up to 10 competitors were launched against a branded product in a single calendar year.
Health insurers UnitedHealth (UNH) and Cigna (CI) have already added Humira biosimilars to their commercial formularies at the same level as the branded version.
MedTech: Goldman views stock selection will be crucial for MedTech space, picking Intuitive Surgical (ISRG), Becton, Dickinson (BDX), Zimmer Biomet (ZBH), as well as Abbott Laboratories (ABT), Baxter (BAX), and Stryker (SYK) as its preferred implementations.
According to analysts, for 2023, the consensus revenue and margin projections in the subsector have been readjusted to reasonable levels, while valuations have reached more normal historicals after the pandemic-era “unusual premium” in 2019 – 2021. “We believe the picture for medtech has improved considerably,” after a challenging 2022 marked by macro concerns and lack of pricing power against a backdrop of inflation, they wrote.
Post-pandemic healthcare utilization: Post-COVID normalization of medical procedure volume is another theme Goldman highlighted for 2023, noting a potential outperformance of MedTech, healthcare providers, and managed care as staffing issues/ COVID headwinds ease.
“We see potential for a return of the “Goldilocks” utilization trade in 2023, similar to the years 2014 and 2018, where medtech, hospitals and MCOs could all outperform together,” Haider and the team argued despite forecasting limited consensus-beating upside for managed care.
The firm’s preferred plays in this theme are CVS Health (CVS), Molina Healthcare (MOH), UnitedHealth (UNH), Intuitive Surgical (ISRG), Zimmer Biomet (ZBH), HCA Healthcare (HCA), and Tenet Healthcare (THC).
M&A activity: Citing about $1T capital allocation capacity in Biopharma, MedTech, Life Sciences, and managed care, Goldman Sachs also points to a favorable setup for M&A deal activity in healthcare, with themes in biopharma and care delivery taking precedence.
The firm expects Merck (MRK) and Pfizer (PFE) to be most active in biopharma deals and project managed care M&A to rise ~6% YoY to $67B in 2023.
Read: Seeking Alpha contributor North Post Research notes a positive correlation between healthcare and inflation in the past and picks Health Care Select Sector SPDR (XLV) as the “best-of-breed healthcare ETF” to benefit from a potential recession.