Health-Care Equities Outlook for 2023

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Michal Marszal, CFA

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Michal Marszal, portfolio manager for the global health-care strategy at CIBC Asset Management.

I believe right now, heading into the rest of 2023, healthcare equities, broadly speaking, are a relatively attractive place for global equity investors. I would characterize the outlook as one of cautious optimism, which is that from a certain perspective, looking at historical valuations, the sector is not at the cheapest level today, but it also does have a fairly strong fundamental outlook.

My perspective on 2023 is that it’s going to be a year for global healthcare that will largely lack major meaningful economic or regulatory catalysts that specifically pertain to the major healthcare systems in the world. And therefore, the performance of the sector will be largely driven by the broader macroeconomic backdrop, as well as, very importantly, any changes to the current expectations of global monetary policy.

When we look at the first elements that I mentioned, the macroeconomic development anticipated this year, a potential variety of recessionary scenarios in major healthcare markets. That will be mostly having an impact on only certain segments within global healthcare, and those segments are largely confined to pockets of discretionary spending within medical technologies, as well as healthcare utilization plans that we will see within healthcare services.

The second element, which is the monetary policy outlook and the anticipated changes to interest rates, will have an impact most disproportionately within the smaller, higher-growth pockets of broader healthcare technologies, which include medical devices, as well as research tools. And of course, they will also have a significant impact on the valuations within the biotechnology sector.

My personal perspective today is one of a relatively balanced approach to investing within the sector, with a modest defensive field. I find the broader pharmaceutical sector highly attractive for investors, largely defensive, and insulated from the aforementioned headwinds as we all go through 2023. And possibly taking advantage of dislocations within some of the more interest rate sensitive sub-sectors, such as biotechnology, which provide for the ability of additional capital deployment, tapping into these so-called external sources of innovation or external sources of growth.

The best-positioned companies, in my opinion, within that, are companies such as Johnson & Johnson, Roche, Novartis, as well as Sanofi. Very strong management teams, highly durable, defensive-based business assets, and underappreciated pipelines of late-stage clinical candidates. I would also point to specific assets within the biotechnology sector, which as long as appropriately sized for the type of volatility that we may be experiencing this year, do represent highly attractive investment opportunities. Here, companies such as Revance, or on the smaller side, Keros or Mersana, are very attractive pipeline platform technologies, with a fairly attractive and rich catalyst window, specifically this year.

Within the healthcare technology sub-segment, I would split that separately into the device sector and the research tool sector. Within the first one, my outlook here is somewhat cautious. I already mentioned some of the macroeconomic risks that could be affecting pockets of medical devices. Mostly having a negative impact on healthcare utilization, especially within areas of more discretionary types of procedures. Here, we’re thinking of sectors such as orthopedics, et cetera. These are largely to be avoided this year, in my opinion. However, there are also specific individual companies that do have a better outlook. I would here specifically mention some of the most discounted names with very, very high-quality businesses that should be going through certain idiosyncratic types of recoveries through to 2023. Companies such as Metronic or even Philips certainly come to mind when thinking of these types of assets.

Within research tools, I think that the fundamentals are much more solid and defensive, unlike the device sector, albeit the entire sub-sector itself is also trading at reasonably elevated valuations. However, companies that have broad exposure to all of the pockets of this space, very highly attractive growth opportunities within this sector could be tapped into by investing in companies such as ThermoFischer or Merck KGaA.

I would also point investors towards some of the more specific to the highest growth segments within healthcare research that have been highly discounted as a result of the broader selloff in the technology sector within the equity. And here, companies such as 10X Genomics or Akya are some of the list of assets that I think are very attractive to investors, especially heading into this year. These companies are exposed to some of the highest growth segments that we’re currently seeing within the research domain of healthcare, and that’s both preclinical research, as well as clinical research. These are segments of so-called spatial, genomic, or proteomic analysis.

Within the last major segment of healthcare, healthcare services, here, I would highly recommend a very targeted approach. Going after high-quality assets in very defensive segments of services that are also largely exposed to fairly intact and durable growth drivers that are really secular in nature and not exhibit much cyclical behavior. Managed care continues to be a very attractive segment for investors within global healthcare, and here, domain leaders such as United Health or CVS are really great types of stocks to obtain exposure into this sub-sector. For long-term-oriented investors, some of the highest-quality companies within the so called contract manufacturing or contract research domain within services are also today very attractive investment opportunities. Companies such as IQVIA, which is a category leader in outsourcing research and development services, enabled by very advanced data analytic capabilities, would certainly come to mind. And within contract manufacturing, companies such as Lonza should perform quite well this year and beyond, within the space.

The only additional major driver that probably should be considered by core investors is the evolution of residual Covid, and that’s particularly important for China. As the Chinese market does open up, it may mitigate some of the challenges with respect to healthcare utilization that we may see in the Western markets, but of course, that recovery may be highly gradual. And really, mostly outweighed towards the second half of 2023, with a number of moving pieces, in terms of the speed to recovery, the evolution of the prophylactic vaccine, or therapeutic modalities within that market. Which today, are yet to be determined, in terms of the type of projected developments that are going to be happening in the market in 2023. But certainly a very important driver for global healthcare for investors to be paying attention to this year.