The ASX Healthcare Index was up 10pc in November, but still down for the year
What can healthcare investors look forward to in 2024?
Fund manager Janus Henderson explains its view in the sector
In November, the benchmark S&P/ASX 200 Health Care [XHJ] notched up one of its best months in over a year, with the index rising by 10%.
On a year to date basis however, the XHJ index is still down almost 5%.
In general, the healthcare sector is coming off a year of underperformance as Covid sales declined, bond yields rose, and new weight-loss therapies caused disruption.
As a result, many healthcare valuations have contracted.
The team at Janus Henderson led by portfolio managers Andy Acker and Daniel Lyons have written a note on what to expect from the healthcare sector in 2024.
Acker and Lyons are basically of the view that looking ahead, the road for the sector could begin to smooth out.
“Attractive valuations, numerous medical advances, and positive long-term demographic trends have put the sector into a position of unusual strength in our view – with the potential to reward long-term investors,” said the note.
Normalising markets
For much of 2023, the healthcare sector had to nurse a Covid-19 hangover.
Demand for diagnostics and the “picks and shovels” used to manufacture vaccines, for example, waned. Some companies forecast their Covid revenues will drop by as much as 80%.
“This was necessary and something we expected,” said Janus’ note.
“Encouragingly however, excluding Covid products, many biopharma earnings have continued to grow.
“Firms have also acted to right-size cost structures, which is expected to support profit margin expansion over the coming year.
“In short, after a rare year of earnings declines for the healthcare sector, we expect earnings to stage a recovery in 2024.”
An improving interest rates backdrop
An end to the Fed Reserve’s rate-tightening cycle could be a boon to biotech, said Janus Henderson.
“Rate cuts could also be welcome even if they signal we are headed for an economic slowdown or recession.
“Historically, biotech has tended to outperform during such periods, benefiting from a lower discount rate and, most importantly, innovative drivers that are independent of economic growth,” noted Janus.
Attractive valuations
Valuations in healthcare device firms and traditionally defensive areas such as managed care have been hit in 2023.
In biotech, many stocks traded at even bigger discounts – by some measures, the biggest we’ve ever seen.
“This is not unusual, as we tend to see biotech underperform amid rising rates, with less focus on stock-specific developments,” said Janus.
“But some market moves seemed extreme as even positive news… would sometimes result in negative returns.
“Once again, we think the selling is overdone.”
“Biggest market opportunity yet in biopharma”
Finally, it was hard to miss the enthusiasm for a new class of weight-loss drugs known as GLP-1 agonists this year.
These therapies work by mimicking gut hormones that regulate appetite, and have achieved unprecedented levels of weight loss in patients – anywhere from 15% to more than 20%.
Data suggest the drugs could have other health benefits, too. In clinical trials, Wegovy – the first GLP-1 indicated for obesity – reduced the risk of heart attack, stroke, and death in people with cardiovascular disease and obesity by 20%.
“We believe GLP-1s could be the biggest market opportunity yet in biopharma, with sales topping $100 billion before the end of the decade,” said Janus.
“But we think the reality will be far more nuanced and that the knee-jerk reaction, which has driven down medical device and select biotech stocks, is overdone.
“For one, it could take decades for GLP-1s to bend demand curves.”
AND NOW, TO THE ASX..
Here are the top ASX Biotech Winners for November 2023
Scroll or swipe to reveal table. Click headings to sort.
Imugene (ASX:IMU) shares rose by as much as 30% on Tuesday after the company’s novel cancer-killing virus, CF33-hNIS (VAXINIA), was granted Fast Track designation from the US FDA.
The Fast Track was granted based on the promising data from Imugene’s Phase 1 MAST trial where low doses of VAXINIA were administered to patients suffering with bile duct cancer.
Bile duct cancer is a rare disease in which malignant (cancer) cells form in the bile ducts. This cancer is known to be difficult to treat, and typically responds poorly to drugs.
VAXINIA meanwhile is a type of oncolytic virus, and is being used as a novel form of immunotherapy to infect and destroy cancer cells.
Oncolytic virus therapy offers a promising approach because cancer cells often have impaired antiviral defences that make them susceptible to infection.
Once the cancer cell is infected, these oncolytic viruses deliver therapeutic payloads specifically to the tumours and cause the cancer cells to “burst” — killing them and releasing cancer antigens.
These antigens can then stimulate immune responses that can seek out and eliminate any remaining tumour cells nearby, and potentially anywhere else in the body.
Market darling 4D Medical has been rising after a series of announcements.
The company’s shares jumped 10% last week after announcing a Memorandum of Understanding (MoU) with Koninklijke Philips N.V. (NYSE: PHG).
Philips is a leading global healthcare company, and the deal will establish a strategic collaboration to expand federal and commercial sales opportunities for 4DX’s XV Technology in North America.
The initial focus of the partnership will be to offer 4D lung imaging as a critical screening solution for US Veterans exposed to burn pits.
4DX has also been surging after announcing that its XV LVAS scanning device has been included into the US Centers for Medicare & Medicaid Services (CMS).
The inclusion today means that from 1 January 2024, XV LVAS scans conducted in a US hospital outpatient facility for Medicare patients can be billed to CMS.
CMS has accepted the reimbursement request and finalised assignment of the Category III CPT code for XV LVAS to the rate of US$299 per scan.
The company also said it has received clearance for its CT-based ventilation product, CT LVAS, from the US FDA.
The clearance will expand and broaden patient accessibility of functional lung imaging in the US, following the recent CT LVAS rollout in Australia.
4DX’s XV LVAS uses X-rays to create detailed images of lung movement and function during breathing. It gives clinicians a clearer picture of lung health for pulmonary disorders including asthma, COPD, cystic fibrosis, and even cancer.
IDT has also been rising after saying it is well placed to benefit from the rapid growth in the medicinal cannabis and psychedelic markets, given that IDT is one of the select few facilities that comply with the recently introduced GMP regulations.
During the last quarter, IDT’s potential sales pipeline also continued to grow, with the company generating 75 potential sales leads and signing confidentiality agreements with 15 potential clients.
In the quarter, the company also submitted proposals worth an additional $11.3 million, and secured sales contracts worth $1.2 million.
RNA-therapies focused biotech, PYC Therapeutics, said its fourth drug candidate had disease-modifying potential in patients with end-stage renal failure due to PKD (polycystic kidney disease).
A study conducted by PYC in human 3-dimensional models showed that its investigational drug candidate, PYC-003, could address PKD at the root cause.
Results showed a deduction in cyst size and frequency following treatment with PYC-003 in a human 3D model, which was generated using tissue collected directly from the kidneys of PKD patients.
These results complement data from animal models highlighting the ability of PYC-003 to reach the cells affected in PKD.
PKD is a life-changing disease affecting 1 in every 1,000 people, with an addressable market of >US$10 billion per annum. As such, it is an area of major commercial interest for the drug development industry.
In a major strategic leap forward, Perth-based SaaS company, InteliCare, announced a Memorandum of Understanding (MoU) with Australia’s largest independent not-for-profit aged care provider, Bolton Clarke.
Bolton Clarke operates 88 residential aged care homes and 38 retirement villages across the country and serves more than 130,000 clients through its community care programs.
Under the MOU, InteliCare’s platform will be implemented through selected Bolton Clarke sites and services where it will be assessed and then, in collaboration with InteliCare, enhanced and tailored to meet the requirements of each environment.
A key player in the aged, disability and healthcare sectors, InteliCare’s AI-driven care platform allows carers and care providers to track activity levels, patterns of behaviour, health metrics, and sleep.
And Here are the ASX Biotech Losers for November 2023
The views, information, or opinions expressed in the interview in this article are solely those of the broker and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.
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