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Patricia Bannan:
Hello, this is Patricia Bannan, Head of Equities for CIBC, Private Wealth and Co-portfolio manager of the CIBC Discipline Equity Strategy. Today I am here with two of our equity healthcare analysts, Kate Bergin, an analyst on our all cap growth and global sustainable equity strategies and Mac Price, an analyst on our disciplined equity and mid cap growth strategies to get their take on the healthcare sector and specifically to give us a deeper insight into the most notable themes within healthcare innovation. Before we dive in, Mac, perhaps you can help set the stage for us. 2023 was certainly an interesting year for healthcare in which we saw significant and unusual underperformance for the sector. Can you talk about what you believe is in store for 2024?
Mac Price:
Yeah. Hi Patricia. Absolutely. So 2023 was a very interesting year. We think healthcare is set up pretty well here. We certainly expect it to put up better performance relative to the S and P 500 than it did last year. That's a pretty low bar though. So just to maybe level set, we should probably touch upon how healthcare's performed in the run up to this year. So it actually had decent relative performance in 2022. The healthcare sector held in a little bit better than the S and P 500. So you'll recall the market declined a bit. Healthcare held in about 15% better, but then there was massive underperformance last year, 2023. In fact, healthcare underperformed the S and P by about 25%, which just to frame that, put it into perspective, that was the worst underperformance recorded in three decades according to Goldman Sachs. Now, within the healthcare sector, there was actually a wide dispersion of outcomes, and this was driven by certain themes that were kind of undercurrents within healthcare.
So one of those themes was healthcare utilization with a rebound in seniors using healthcare. So a lot of seniors had put off seeing their primary care physicians during covid, and then they came back with a vengeance in 2023, and it appears that they had a really strong catch-up in diagnostics and medical procedures and hospitals were clear beneficiaries of this additional volume. And then medical devices, also medical device manufacturers benefited from the lip and medical procedures and the high utilization perhaps unsurprisingly put pressure on healthcare payers. And what I'm talking about here are the insurance companies. So healthcare insurance names were particularly pressured at the end of the year as it became apparent to everyone that they'd misjudged the utilization pace when pricing their 2024 contracts. So that's what was going on with healthcare utilization. Biopharma, you kind of had a bit of a mixed bag.
So stock selection really mattered here. And the biggest headline in healthcare last year was the dramatic weight loss effect, the GLP-1 drugs. So companies with any exposure related to GLP-1, or any credible weight loss drug in their pipeline, benefited pretty well last year. So even the drug distributors actually did well on the GLP-1 theme because the higher cost of the drug will increase their sales figures, even though these are actually pretty low margin for the distributors. So not a whole lot of that higher sales cost translates to a bottom line benefit. Life science tools were a notable laggard last year, and there were really three principle headwinds that they faced. So the customers of life science tools found it more difficult to raise capital, and therefore they became more conservative with their spend. We also learned that too much bioprocessing product was sold into the system during Covid, and so that caused a bit of an inventory glut. And then about the middle of the year, we saw the Chinese economy faltered. And so this really dampened demand in that region. Now, we believe that many of these themes and drivers for the 2023 performance are actually going to continue through 2024, but we do expect life science tools to do better in 2024.
Patricia Bannan:
So Mac, which carryovers from 2023 do you believe will be the most impactful in 2024?
Mac Price:
Yeah, I think there'll be, as there always is. I've been an noise beneath the surface, but the larger themes that dominated 2023 look poised to persist. And so I point to first, as I talked about the healthcare utilization theme by the elderly, by seniors, that I expect to continue at an above pre covid rate. I'm not really sure when this is going to normalize, when it's going to go back to what you might call trend. It's possible that some of this elevated utilization is just a catch up from delayed care during covid, but it's also possible that because of the lapse of care during covid, these patients aren't as healthy as they might've otherwise been. And this higher utilization is going to persist for some time. And I think it's pretty safe to say that the GLP-1 weight loss theme is going to continue well into 2024 and beyond.
Patricia Bannan:
Yeah, pretty likely, I'm sure. Kate, would you remind us again what GLP-1s are and why they're making headlines right now?
Kate Bergin:
Sure. Tricia, if you're not familiar with the term GLP, you might be familiar with the drug names. Those are Wegovy, Ozempic and Zepbound. And you've probably also heard all the buzz surrounding dramatic weight loss by certain public figures such as, for example, Oprah Winfrey or Elon Musk. And while these GLP compounds have been on the market for over a decade as a means to control diabetes, it's only in recent years that they've been used to target obesity. And the results have really been astounding with many patients losing as much as 20% of their body weight over the course of a year. And so the reason this is significant is because obesity, as we all know, is an epidemic. They're an estimated a hundred million individuals suffering from the disease in the US and about a billion worldwide. But what's equally profound is the rate of additional related diseases or comorbidities that are tied to obesity where there's as much as the 50% overlap and the comorbidities have exorbitant costs to the US healthcare system by some estimates as much as 200 billion annually. So the ability to finally address this massive unmet medical need really looks to be a watershed moment in the history of medicine and human health.
Patricia Bannan:
And how widely are these drugs being used today?
Kate Bergin:
Well, today only a small percentage of the obese population is on A GLP. This is because demand far outstrips supply. And because reimbursement is still lacking for many private and government insurers, however we expect that recently released clinical data, for example, looking at Wegovy and the select trial results, which showed a 20% reduction in cardiac events in the individuals using Wegovy. We expect these will be meaningful in advancing utilization of the GLP. And this is because the strong significance of the clinical results makes it difficult for physicians not to just prescribe the drug when in this case they have a patient who is both obese and suffers from cardiac disease. And similarly, insurers will have difficulty in denying coverage to patients when these therapeutics can meaningfully reduce adverse health events. And so it's notable that the results from several additional clinical trials which look at reduction in symptoms of sleep apnea, osteoarthritis, peripheral arterial disease, chronic kidney disease, and Alzheimer's, all of which will be released over the next 18 to 24 months, we largely expect these trials will prove efficacy and we think they will drive further reimbursement, prescription use and utilization of the GLP.
Patricia Bannan:
And what kind of impact do you expect the GLP to have on the healthcare sector, both short term and long-term?
Kate Bergin:
Well, from a healthcare sector perspective, nearly all sub-sectors and timeframes are impacted. So in the short term pharma companies that may or developing GLPs, the pharma distributors and the PBMs will likely all benefit, and this is given strong and growing volume. At the same time, managed care companies might get hurt by higher expenses. Over the medium term, the financials of medical device names in the areas of sleep apnea, or for example, orthopedics could suffer from lower case volumes. And then again, over the long term, there could be lower growth in cases of cardiovascular disease, heart failure, hypertension, and atrial fibrillation. Additionally, if we make the assumption that lower visceral fat translates into less body inflammation, we could potentially see slower growth in diseases that have not traditionally been directly tied to obesity, for example, Alzheimer's or cancer.
Patricia Bannan:
That's great overview. Now, how do you expect the GLP therapeutic market to evolve over time?
Kate Bergin:
Well, given that using GLP to treat obesity as a relatively new discovery and given how difficult these drugs are to produce today, just two pharma players dominate the GLP space. In a sense it's a duopoly, but over the longer term, we expect the market to broaden out as other pharma companies are able to provide new clinical profiles and perhaps improve side effect profiles and even a pill form versus the current injection form.
Patricia Bannan:
Just one more question for you, Kate. On GLPs, you mentioned the high cost. How do you think the healthcare system will absorb the added expense of these drugs?
Kate Bergin:
Well, that's a great question, Tricia, because you're right, the GLP should reduce healthcare costs in the long run, we know that. But for now, they're very expensive costing around 600 to $700 a month. So our guess is that in the near term, these higher costs are going to have to be shared by both employers and patients in the form of higher premiums. And while Medicare does not currently cover use of GLPs for obesity, we expect that coverage will eventually come following the compelling data that reduces the comorbidities that we spoke about earlier. We also expect the price of GLP to come down over time as more players enter the market.
Patricia Bannan:
Great. Thank you, Kate. Let me turn back to Mac. Mac. You mentioned that life science tools were likely to improve off the underperformance in 2023. Can you elaborate on that a little?
Mac Price:
Yes, absolutely. Yeah, we do expect them to improve. Remember that life science tools companies, they manufacture the diagnostic devices and the consumables that enable drug discovery and production. They also enable academic and government research, and they have also facilitate healthcare diagnostics among other things. So these are really good markets to sell into. And the life science tools names have historically benefited from strong secular tailwinds. However, again, those three major headwinds in 2023 more than offset these tailwinds. So we had the tight capital markets that slash biotech's access to cash, and this action spooked the biotechs and the pharmaceutical companies, which then became very conservative with their spending. We had excess inventory from covid stockpiling, and this caused biotech and pharmaceutical companies to delay orders and delivery of consumables, especially for drug production. And we have the Chinese macroeconomic challenges and China has been a good source of growth for life science tools, names, and the Chinese demand effectively seized up in the middle of last year.
Now we believe that each of these three headwinds is actually receding, so biotechs are having an easier time sourcing additional funds. The cash raise for biotechs in January of this year was the strongest in over two years, and biotech funding just last month in February was actually up more than 80% year over year. So that's good news for biotechs. The excess Covid era inventory has substantially been worked out at this point with several of the life science tools, companies noting that things have recently reverted to the traditional order and delivery cadence that had become elongated in 2022 and 2023, and then the Chinese macro situations at least stabilized. The Chinese government recently indicated that it's going to provide stimulus for healthcare and scientific instrumentation. So both of these should really lift demand for life science tools. So we think that some of the headwinds are going to recede, and meanwhile, the secular tailwinds for life science tools are still very much intact and should carry it through to growth as the headwinds of eight.
Patricia Bannan:
So fair to say, all in all, you're feeling pretty good about healthcare in 2024?
Mac Price:
Yeah, absolutely. I think that's very fair to say. So as always, there will be winners and losers within healthcare, but we do feel good about the sector's ability to regain some momentum in the near to midterm, and we firmly believe that healthcare is going to continue to outperform the S and P 500 over the long run on the back of those strong secular drivers.
Patricia Bannan:
That's a great overview. Kate and Mac, thank you for sharing your great insights into the outlook for healthcare. There's certainly been a lot of change occurring in the industry in recent years, and it doesn't appear to be slowing down at all. We will continue to follow these and other trends in this space. As active managers, we can determine by way of our investment process if and to what extent we may want to invest in the companies where these themes play out, we evaluate not only the upside potential, but also downside risk. And our decisions will always come from bottom up evaluation of business models and their long-term prospects. We thank you for listening. If you have any questions or are interested in hearing more, please reach out to a member of your CIBC Private Wealth team or visit our website at private-wealth.us.cibc.com. Thank you again
Disclosure:
CIBC Private Wealth includes CIBC National Trust Company, CIBC Delaware Trust Company, CIBC Private Wealth Advisors, Incorporated, all of which are wholly owned subsidiaries of CIBC Private Wealth Group, LLC, and the private banking division of CIBC Bank USA. All of these entities are wholly owned subsidiaries of Canadian Imperial Bank of Commerce. This document is intended for informational purposes only and that the material presented should not be construed as an offer or recommendation to buy or sell any security. Concepts expressed are current as of the date of this publication only may change without notice. Such concepts are the opinions of our investment professionals, many of whom are chartered financial analysts, charter holders with certified financial planner professionals. Certified Financial Planner Board of Standards Incorporated owns the certification marks CFP and Certified Financial Planner in the US. There is no guarantee that these views will come to pass. Past performance does not guarantee future comparable results. The tax information contained herein is general and for informational purposes only. CIBC Private Wealth does not provide legal or tax advice, and the information contained herein should only be used in consultation with your legal, accounting and tax advisors. To the extent that information contained herein is derived third party sources, although we believe the sources to be reliable, we cannot guarantee their accuracy. The CIBC logo with a registered trademark of CIBC used under license. Investment products are not FDIC in short, may lose value and are not bank guaranteed.