Kieger Healthcare Monthly Commentary

New Year = fresh start?

2023 is underway, and with it has come a sense of excitement. The month of January saw a rotation out of the winners and into the laggards of 2022, driven by hopes of a continued disinflationary trend, the FED temporarily pausing its action, growing confidence in a soft landing, a brighter-than-expected European outlook and recent news that the COVID-19 outbreak in China might have reached its peak. Against this backdrop, healthcare stocks lost -0.7%.

The overall rotation from the winners to the laggards also applied to Healthcare, which was supported by the J.P. Morgan Healthcare Conference. Finally, the start of the Q4 earnings season – although still in early days – also influenced price action.

Life Sciences Tools & Services rose 3.9%, with investors piling into the poor performing stocks of 2022 (Lonza, Sartorius, Avantor). For bioprocessing, the destocking/inventory discussion remained important, and the general take was that this should wash out over the next quarters. The major CROs had a good run, helped by Icon’s pre-release during the J.P. Morgan conference. Some of the instrumental names took somewhat of a pause in January, following a very strong Q4.

Within Equipment & Supplies (+3.7%), dental names bounced back (Align +28%, Dentsply +16%, Straumann +13%) with vision care stocks also figuring among the best performers (Carl Zeiss +14%, Hoya +13%, Alcon +9%). Shares of new giant GE Healthcare gained 15% after being spun off. Orthopedic firms traded in the lower part of the performance table, hurt by Chinese headwinds and the delay in Intuitive’s next generation robot. Baxter’s announcement that it will spin off its renal care and acute therapies businesses was not well received by investors (-10% in January).

Healthcare IT posted a 3.5% gain in January.

In Biotechnology (-0.5%), investors preferred small and mid cap stocks to their larger peers, with Vertex (pipeline updates and highlighted near-term commercial opportunities in four disease areas) and CSL (FDA approval of Hemgenix in haemophilia B) being the exceptions. In the fight against Alzheimer’s, another important hurdle was overcome in January with the FDA having granted accelerated approval for Biogen’s (and Eisai’s) drug Leqembi. Its annual price was set at USD 26,500 and CMS reimbursement discussions will follow. Finally, M&A deals during the month (Ipsen to acquire Albireo for USD 950m, AstraZeneca to buy CinCor for USD 1.3bn cash upfront, Chiesi to take Amryt over for ca. USD 1.3bn, Royalty Pharma to acquire an interest in Ionis’ royalty in Biogen’s spinraza and Novartis’ pelacarsen for up to USD 1.1bn) also supported overall sentiment.

In the spotlight

Sector performance (continued):
Pharma’s performance (-2.6%) was undermined by the poor performance of some heavyweights. Pfizer dropped 13% after China said that talks to include Paxlovid in its insurance drug list failed and later Moderna presented data on an RSV vaccine that appears to be superior to Pfizer’s data. J&J shed 7%, with an end-of-month adverse court ruling in the talc situation adding to the pressure. Eli Lilly fell 6% after having received an FDA complete response letter regarding the accelerated approval of its Alzheimer’s candidate, eliminating an early approval scenario.

Providers & Services fell 3.0%. Managed Care names figured among last year’s top performers and thus suffered from sector rotation. Further, they were negatively affected by changes to Medi-Cal awards in California in early January. The expected finalization of CMS’ RADV rule added to the uncertainty, but ultimately the fear of the unknown was greater than the actual rule. In Healthcare Services, smaller names’ good performance was not sufficient to offset the weak performance of heavyweights Cigna and CVS. Distributors and Hospitals were both positive.

J.P. Morgan Healthcare Conference: having attended the conference (read our Thoughts from the Street), we note that the key themes from a devices and services perspective were:

The rise of value-based care (VBC): For many years, value-based care – where the outcome is rewarded – was discussed as a solution. It involves the provider being paid for maintaining health, regardless of the treatments needed. This includes a variety of prevention and engagement activities, care coordination to avoid duplications, and generally a more holistic approach to health. The outcome is better health, leading to fewer hospital admissions and ultimately lower costs. It now finally appears that VBC is at a tipping point, at least in the US. From regulators to health insurers to providers, everyone is beginning to embrace VBC.

Innovation & digitalization: Our impression at the conference was that pipeline developments received a renewed focus. We think that “flywheel dynamics” are currently at play, whereby R&D investments through technological advances and digitalization are creating opportunities to target diseases in novel ways. This leads to the development of cutting-edge products and services, which in turn generate significant new markets. Financial success in these new markets allows companies to reinvest greater amounts into R&D, leading to even more innovative products and services. Such dynamics are presently visible for instance in diabetes care, telemedicine, surgery robotics and catheter-based therapies for the heart.

Chart of the Month: prevalence of selected chronic diseases by US household income buckets

Households that earn less than USD 35,000 have a 2.4x, 2.6x and 1.9x higher prevalence of strokes, chronic bronchitis and diabetes, respectively, compared to those whose earnings stand above USD 100,000. The reasons for this differential are a lesser access to healthcare (treatment and preventive care), living in areas with poor air quality and limited access to healthy food options, as well as a lack of social support and the stress associated with living in poverty, which affects physical and mental health. On a positive note, there is a clearly observable trend that health insurers and providers have started to consider such social determinants of health. Check out our video on this subject on: Link.

Kieger Healthcare Team

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