2023 was not a good year for the healthcare sector, but some investors expect it to return this year, highlighting biotech and medtech as areas to watch. “Emerging from a poor capital-raising environment in 2022-23, where early-stage biotech companies struggled to fund their R&D efforts amid rising interest rates, the battered sector is finally seeing a resurgence.” in M&A deals as the new year begins,” Citi Global Wealth Investments said in a Jan. 14 note. So far in January, transactions worth about $9.6 million have already been carried out, the bank said. As a sector, healthcare underperformed the broader market last year, with the iShares US Healthcare ETF gaining only about 2% through 2023. But now, Citi believes “astute investors may find themselves in for a treasure of recovery opportunities. He urged investors to reflect on the “inherent resilience” of healthcare over the long term, noting that the sector posted positive earnings growth during three recent global earnings downturns. “As macroeconomic tides turn, we see healthcare as an unstoppable trend benefiting, with growth prospects far beyond those of anti-obesity drug makers,” Citi said. The GLP-1 (glucagon-like peptide 1) drugs, originally developed as a treatment for diabetes but now popularly used for weight loss, shook the industry last year. The healthcare industry “appears poised to return to leadership,” given demographic changes and the benefits of artificial intelligence, the bank said. “We expect the recovery in healthcare revenues in 2024 to be one of the main drivers of the sector's potential outperformance,” he added. Investment picks and tips Citi said it is “particularly attracted to” discount valuations in the technology and medical tools segments, while biotech “looks like a high-risk, high-reward play” as they are expected to start interest rate cuts. Growth stocks, such as technology and biotech, often benefit from rate cuts. Citi's top picks in biotech include Biomea Fusion, Alnylam Pharmaceuticals and Immunovant. Jared Holz, healthcare sector strategist at Mizuho Securities Americas, named biotech company Biogen as one of his top trade ideas for 2024. He said 2024 looks to be a better year for Biogen as it appears poised for a ” full-year” sales in its Alzheimer's treatment Leqembi. He noted that Biogen is developing an injectable version that “should dramatically improve longer-term absorption.” Holz added that Biogen remains in a “strong position” to acquire other assets and is small enough that it could even be a target for acquisitions at some point. In medical technology, Citi described some medical device makers as “'picks and shovels' needed for drug development.” Some work alongside biopharmaceutical partners in areas such as drug formulation and packaging, while others produce devices that are worn or implanted in the body for diseases such as heart disease or diabetes. Citi highlighted another investment opportunity: manufacturers of equipment used in robotic-assisted surgery. And Trent Masters, global portfolio manager at Alphinity, on Tuesday singled out surgical robotics maker Intuitive Surgical as one of his “top conviction calls.” “Most medical technology was severely affected by the GLP1 mania in October of last year, where it seemed like expectations were that GLP1 drugs would make everyone healthier and eliminate the need for procedures,” he said. “But what we're seeing now in medical technology is more nuance around longevity being a positive for procedures to balance the potential loss of a healthier population,” Masters added. As for those who would rather invest in an exchange-traded fund than individual stocks, Matt Orton, chief market strategist at Raymond James Investment Management, says he prefers the healthcare sector right now and likes the iShares US Medical ETF Devices. “Biotech has had everyone's attention, but the recovery of many of the best medical device companies after the GLP-1 sell-off has been remarkable,” Orton said. “I think there is still room to run for names like DexCom, Intuitive Surgical, Abbott Laboratories and this ETF is the best way to get exposure,” he added.
