Analysts Predict Brighter Outlook for Healthcare Investment in 2024

Investment experts predict stronger performance in the healthcare sector in 2024, overcoming the difficulties it underwent in 2023 and increasing the probability of M&A dealmaking.

The sector had some positive momentum in 2023, mainly due to the emergence of the GLP-1 drugs as weight loss treatments, which saw leading developers Eli Lilly and Novo Nordisk significantly outperform their peers.

Jon Stephenson, senior portfolio manager at BNP Paribas Asset Management, said: “Had it not been for the significant outperformance of the anti-obesity stocks, the healthcare sector would have been down for the year. Moving into 2024, the outlook is significantly rosier.”

Last year, numerous healthcare companies struggled to match the revenue they generated in 2022. However, year-on-year comparisons are complicated as the Covid-19 vaccination push brought in high earnings that year.

High interest rates in 2023 also posed a problem for small- and mid-cap biotech and medical technology companies, hindering access to capital and depressing share prices.

KPMG’s examination of the healthcare sector found deal volumes for life sciences and healthcare dropped from 2022 levels, with life sciences transactions declining from 1,133 to 919, and healthcare deals falling from 1,001 to 857, with much of this retreat occurring in Q4 2023.

The current environment

The healthcare sector is trading within its historical valuation range, but at the low end of its 10-year range relative to the broader market.

Stephenson argued the increasing valuation discount reflects investor uncertainty around the sector’s financial prospects. He said this was driven by downward revisions within the life science tools and Contract Research Organization (CRO) industry, fundamental concerns related to the large-cap biopharma industry and “irrational” fears about the long-term viability of medical technology markets.

He said: “We see this as an opportunity for investors as we believe many of the factors that led to healthcare’s underperformance in 2023 are either improving or about to, and because strategic acquirers appear both motivated and financially able to act.”

BlackRock experts also predicted a “benign” regulatory environment for healthcare in 2024, despite some concern over regulatory risk in US presidential election year. It said that while rhetoric on healthcare regulation is likely to increase during the campaign period, it does not expect drastic healthcare policy changes.

Medical devices and supplies

BlackRock identified technological advances in minimally invasive procedures as an attractive investment opportunity, particularly surgical robotics.

It said in its 2024 Outlook: “We appreciate the inherent strength in the underlying business models of companies in the [surgical device] space. Notably, the high degree of recurring revenue from instruments, accessories and services makes these companies more defensible between capex cycles.”

KPMG also found that after three years of depressed elective surgery volume, investment in medical devices now appears to be climbing past pre-pandemic levels.

It said this means optimism around medical device companies may begin to rise, and M&A could recover from the low levels of 2023.

KPMG also identified innovations in cardiology, robotic surgery and internet-connected wearable devices as areas that may spur dealmaking in 2024. It said innovation across robotics, AI, machine learning, and IoT are driving advancement in this field, and 2024 is likely to include a range of deals focused in these areas.

Stephenson also predicted a strong year in terms of M&A and noted that around 25% of the 2024 large-cap biopharma revenue will face patent expiry before 2030, while Medicare direct price negotiation (under the Inflation Reduction Act) will likely create another headwind starting in 2026.

He said this, combined with the fact that large-cap pipelines are insufficiently deep to replenish this revenue gap, creates a massive incentive for consolidation.