Kieger Healthcare Monthly Commentary

In the spotlight

Important topics for 2023:
Equipment & Supplies: Overall, Medtechs, which have been rather slow in passing through rising input prices to patients, should see benefits on both the top and bottom lines over the coming year. For elective procedure-dependent names, 2023 could be a year of relief, as further moderation in hospital staffing challenges could finally help work through the backlog. Consumer-facing segments (Dentals, Hearing Aids, part of Vision) may present more muted results at the onset of 2023, with cost-of-living pressures continuing to weigh on consumer demand. That said, with the stocks trading at multi-year-low valuations, silver linings on the macro front could make them attractive again to investors. For hospital-capex firms, the debate regarding client capex cuts vs. the need for automation to counter staffing pressures will remain an overhang.

Providers & Services: In Managed Care, focus points will be the path of normalisation in non-COVID-19 procedure volumes and whether there will be an uptick in acute care due to delayed intervention. On the legislative front, the CMS’ upcoming final RADV (Medicare Advantage Risk Adjustment Data Validation) decision (expected by 1 February 2023) could impact MA-exposed firms. For Hospital Providers, 2023 could herald a further normalisation in baseline utilisation (non-COVID-19 volumes) and some data points to a stabilisation/improvement on the labour front (shortages, wages). For Drug Distributors, the environment should remain favourable in 2023 with durable drug demand, stable pricing and a growing biosimilars opportunity.

Tools & Services: Near-term, bioprocessing inventory (de-)stocking issues will continue to be at the top of investors’ minds and it might take one or two quarters to reach a more normalised growth pattern. For the more instrument/equipment-dependent firms and those with greater exposure to the industrial sector, a further deterioration of the macro environment could become a headwind. However, compared to 2008/2009, many firms are now serving less-cyclical segments of the industrial sector. For CROs, the state of the biotech funding environment remains an overhang. Recent data points showed an improvement, but it remains unclear whether these were just one-off events (year-end budgets, large single tickets, …). Still, a lot does already seem priced in, with company valuations sitting at multi-year lows. M&A-wise, 2022 saw only limited M&A activity in the Tools & Services subs-sector. 2023 could thus become an interesting year again for transformative deals. Many companies are sitting on hoards of unspent cash from the COVID-19 years and valuations for acquisition targets moderated significantly in 2022.

Pharma: 2023 will be the year of Alzheimer’s, with regulatory approvals and CMS coverage decisions. In obesity, launch progressions in approved indications for Mounjaro (Eli Lilly) and Wegovy (Novo Nordisk) will be closely followed. Pharma shares saw macro-driven multiple expansions in 2022, we would not be surprised if that will reverse with a more optimistic market.

Biotechnology: Abbvie’s mega-blockbuster Humira exclusivity will draw to a close in 2023. Although not the first drug to face biosimilar competition, what has been unseen to date is the magnitude of firms (10) that will be launching a biosimilar against a branded product during a single calendar year. 2023 will therefore offer valuable insights for the biosimilar market (market share dynamics among entrants and Abbvie’s loss of volume to them). Further, after 7 quarters of underperformance of small and mid-cap Biotech stocks, the segment is ready for a rebound. For this to happen, investor optimism and the funding environment (see above) must improve.