Photo: Rune Sande © DNB
By Rune Sand, Portfolio Manager at DNB Asset Management
Despite geopolitical uncertainty and the ensuing energy-price shock, global equity markets are showing remarkable resilience. Yet the healthcare sector, left on the sidelines of April’s stock-market rebound, still has plenty to offer.
Last month, the MSCI World Health Care Index fell 0.2% in US dollar terms, underperforming the global market by 9.8 percentage points — the sector’s weakest relative monthly performance in 17 years, even as equity indices recovered. This unusually sharp underperformance, however, appears to reflect less a deterioration in fundamentals than a short-term market rotation: investors favored more cyclical segments and stocks with greater exposure to AI. In that context, healthcare seems to have served as a source of funding.
In our view, this gap between weak share-price performance and sound fundamentals supports a constructive stance on the sector. Many companies are posting growth broadly in line with expectations, earnings appear solid, and political and regulatory risks also seem to be easing. We currently see no obvious fundamental reason why the sector should be lagging the wider market to such an extent.
US health insurers performed particularly well in April. Names such as Centene, UnitedHealth and Humana advanced sharply, supported by solid quarterly results and a significant upward revision to the temporary adjustment in Medicare reimbursement rates. Several innovative healthcare companies also stood out: Glaukos impressed with a strong quarterly report, Axsome Therapeutics benefited from US approval for a drug targeting agitation associated with Alzheimer’s disease, and Novo Nordisk rose without any specific company news, likely supported by continued strong US revenue growth from the oral version of Wegovy.
For a large part of the healthcare sector, artificial intelligence is likely to be more of a value-creation driver than a risk factor over the long term. While investor attention is currently focused mainly on hyperscalers and semiconductor-related stocks, a wide range of practical use cases is emerging in healthcare. Pharmaceutical companies are investing in AI and high-performance computing to accelerate drug development and reduce research costs. Medical technology companies are embedding AI into their software solutions, while healthcare services providers can use it to improve operational efficiency and contain costs.
That said, AI does not represent a uniform opportunity across all segments of the sector. One potential disruption risk concerns CROs (Contract Research Organizations) — the firms that support pharmaceutical companies in running clinical trials and analytical work. The market is indeed questioning whether AI may eventually take over part of the research and analysis currently outsourced to them. On the other hand, CROs could also use these technologies to enhance their service offering and improve the efficiency of the clinical trials they manage. At this stage, however, we believe that for most of the healthcare sector, the long-term opportunities linked to the adoption of artificial intelligence far outweigh the risks.
Another supportive factor deserves attention: the mergers and acquisitions (M&A) backdrop. Over the next few years, many major pharmaceutical companies will face the expiry of key patents and will need to strengthen their product pipelines. At the same time, they have robust balance sheets, high cash holdings and limited debt. Conditions therefore appear favorable for a recovery in M&A activity in the biotech segment.
From a valuation perspective, healthcare also calls for nuanced analysis. European pharmaceutical stocks often trade at a discount to their US peers. This reflects structural realities such as greater pricing pressure, slower market access and the fragmentation of European markets. Even so, this can also create opportunities for companies with a global footprint, an innovative product portfolio and strong exposure to the US market. The key question remains whether the market is underestimating their structural growth potential, or whether the discount is justified by the risks tied to patent expiries and less dynamic research productivity.
That said, the sector is not without risks. In medical technology, rising energy prices and logistics costs can weigh on some players, particularly those whose products contain a significant share of plastic components. By contrast, the impact is much more limited in other healthcare segments. For pharmaceutical groups, raw-material costs account for a relatively small share of the cost base; the effect is even more marginal for biotech companies and virtually negligible for healthcare service providers.
Finally, certain one-off events, such as product recalls, can occasionally put short-term pressure on share prices. The recent product recall announced by Insulet is one example: according to the company’s disclosures, it concerned only about 1.5% of its global production and should not have a significant negative impact on its long-term outlook.
The overall outlook therefore remains positive: healthcare is fundamentally strong, defensive in nature and rich in innovation potential. Short-term share-price swings remain difficult to predict, so the focus should remain primarily on long-term structural drivers. As investors have recently been swept up in enthusiasm for technology and AI, healthcare may well be poised to move back into the spotlight. For investors seeking quality, structural growth, M&A optionality and long-term applications of AI, the sector is therefore well worth a closer look.
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