Kieger Healthcare Monthly Commentary

Clouds were banking up…

…and despite all that, healthcare equities held up well, gaining 3.3% in March 2023.

The broad picture
Pharma was up 4.9% and benefitted from a flight to safety. European large caps continued to be preferred over their US peers. In March, the theme of drug pricing gained attention once again.

Equipment & Supplies rose 4.9%. Sector headlines and newsflow was rather muted, but the area stayed in vogue with investors.

Biotechnology gained 3.7%, defensive names outperformed SMID caps. The collapse of SVB, an important partner for smaller biotechs, exacerbated existing funding constraints. Two major deals took place in March (Pfizer and Sanofi).

Life Sciences Tools & Services companies fell hard after the SVB breakdown with concerns around the biotech funding model lingering. Nonetheless, many companies managed to recover over the month. The sector closed positive at 2.8%.

Providers & Services lost 2.1%, but hospitals and distributors were fine. Managed Care has not been acting as defensively as many would have expected, with policy risk remaining an overhang. Companies with a pharmacy benefit manager (PBM) exposure traded weak on multiple news.

Our take

What promised to be a chaotic macro month certainly did not disappoint. But this time for different reasons. Markets were
rocked by the declines of Credit Suisse and SVB, sending shockwaves all the way into healthcare. However, governments managed to restore some confidence – at least for now. And in the midst of it all, Biopharma saw the largest acquisition in 4 years.

In detail

Earnings season:
Pharma was up 4.9% and European large caps were preferred over US peers (with the exception of Eli Lilly). Top performers were Sanofi (positive Dupixent data showing 30% reduction in COPD exacerbation and improvement in lung function vs placebo), Novartis (positive initial results for Kisqali in adjuvant breast cancer demonstrating a significant decrease in the risk of disease recurrence vs standard of care therapy) and Novo Nordisk (failure of smaller peer / positive phase 3 data for high dose oral semaglutide in diabetes). In March, the drug pricing theme gained attention again. First, focus has been on certain provisions outlined in Biden’s 2024 budget, which aimed to extend Medicare negotiations to a greater number and variety of drugs than what was initially outlined in the Inflation Reduction Act (IRA). Later, the CMS released its initial guidance on the implementation of IRA drug price negotiation provisions. What is new is that drugs will be targeted at the molecule level, rather than at the branded level, and that all doses and forms of a single source drug will be considered the same. Stocks digested the news without problems.

Equipment & Supplies rose 4.9%, sector headlines were rather quiet. Positive performance was broad based (37 out of 42 sector sub-stocks were positive). Large hearing aid names’ performance stood out (Sonova 19.2%, Demant 16.6%), driven by reported growth in the Veterans Affairs channel. Insulet also rose sharply after the company was selected to replace SVB in the S&P 500.

Biotechnology gained 3.7%, with large caps outperforming SMID caps. With funding constraints already a concern, the collapse of SVB accentuated negative sentiment, triggering a sell-off in smaller biotechs. SVB was an important banking partner for US venture-backed biotechs that went public in the past years. Despite SMID biotech’s broad denials of having material exposure to SVB and deposit reprieve issued by US authorities, investors remained sceptical. In early March, rumours that Pfizer was interested in acquiring Seagen, helped the sector. Later, the deal was confirmed for USD 43bn. This represents the largest transaction in the sector since June 2019, when Abbvie bought Allergan for USD 63bn. Another acquisition was carried out by Sanofi, which acquired Provention Bio for USD 2.9bn.

Life Sciences Tools & Services grew 2.8% and performance dispersion was high. Illumina performed best (16.7%), with shares rocketing after activist investor Carl Icahn embarked on a proxy fight. The sub-sector was off to a good start in March, but then sold off after the SVB collapse as many firms are dependent on a well-functioning biotech funding model. Many stocks regained traction over the month, however, CROs stayed depressed.

Providers & Services lost 2.1%, with Hospitals up 5.7% on encouraging labour and volume outlook trends. Services fell 8.2% as Biden’s budget release (see above) put some pressure on firms active in the PBM space. CVS and Cigna both dropped on fears of a spillover effect. Earlier, the Congress started an investigation into PBM’s tactics to increase drug costs. Moreover, Eli Lilly, Novo Nordisk, and Sanofi announced lowering the list prices of their insulin products, increasing the strain on the diabetes rebate pool. Distributors initially dropped on Biden’s budget-news, but managed to recoup losses, closing March up 2.8% For Managed Care, policy uncertainty continued to weigh on the group, which shed 1.2%.

Chart of the Month: 5-year survivors with colon cancer

Coronary heart disease and stroke, both classified as part of the cardiovascular disease (CVD) category, are responsible for 27% of total deaths. The main risk factors for CVD are hypertension, diabetes and obesity. Although the disease will become even more important going forward, investments in CVD drug development are much lower than in other therapeutic areas. One reason is tWhen colon cancer is detected at a very early stage, 9 out of 10 patients will survive 5 years. When colon cancer is already very advanced only 1 in 10 patients survives 5 years. Fortunately, there is promising innovation on the horizon that could greatly improve cancer screening and early detection. In the future it will be possible to detect colon cancer in the blood of a patient. A number of companies are developing liquid biopsy techniques, which involve screening a patient’s blood to detect cancer cells or biomarkers. Check out our video on this subject here.

Kieger Healthcare Team

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