Will healthcare overtake AI as the top investment theme in 2024?

The Novo Nordisk share price is up 51% over the past year, while Eli Lilly is up 84%

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If AI was the dominant theme in 2023, healthcare might snap at its heels in 2024. Healthcare has often been characterised as dull and defensive, but breakthroughs on obesity drugs, on Alzheimer’s treatment and on personalised medicine are creating new avenues of growth. How significant are the developments in the healthcare sector for investors?

The biggest area of development is on obesity. Danish multinational Novo Nordisk has led the way, with its Wegovy treatment for obesity and Ozempic for diabetes. Both drugs replicate a naturally occurring hormone GLP 1 (glucose-like peptide). Zepbound from Eli Lilly has also been approved, which combines GLP 1, with a second hormone ‘GIP’ (gastric inhibitory peptide).

The drugs work by increasing the feeling of fullness, so users eat less. They also improve insulin secretion and lower blood sugar, which is why they are being used for the treatment of diabetes. They also appear to reduce inflammation in the body, which has multiple health benefits, from brain function to organ health.

These drugs appear to present a solution to one of the most intractable medical problems facing Western countries. According to the World Health Organisation, 42% of US citizens are obese, and a further 31% are overweight. Obesity is becoming an increasing problem in children and the WHO forecasts a potential annual bill of $4trn globally for treating the consequences of obesity by 2035.

Investors have been quick to recognise the opportunity. The Novo Nordisk share price is up 51% over the past year, while Eli Lilly is up 84%. Gareth Blades, analyst at Amati Global Investors, says healthcare systems are now grappling with how to manage demand when so many patients are aware of the drugs and could benefit from them.

He adds: “Lilly and Novo have both said demand will outstrip supply in 2024. Diabetes versions have sold out and there are stories on the internet about an illegal trade in them…The health authorities are focused on health outcomes and health inequalities. Obesity and being overweight is correlated with so many devastating illnesses – cardiovascular disease, chronic kidney disease, etcetera. Tackling obesity would have broad effects across the system.”

At the margins this has also been a problem for some healthcare providers. Those involved in bariatric surgery and devices have seen their share prices struggle. There has also been an assumption that demand for cardiovascular treatments will drop and other areas linked to obesity treatment. There has also been some pressure on the share prices of fast food companies such as Coca-Cola and McDonalds on the assumption that they will lose a share of their market.

See also: How to avoid the boom and bust of healthcare and biotech investing

In both cases, share prices may have moved too far. Peter Hughes, portfolio manager of the Redwheel Life Changing Treatments Strategy, says: “We are sceptical of the market’s belief that other companies will lose out from better treatment of obesity, we believe this is a large market and what patients need is different, so many solutions can and should be available to patients.”

Blades says that if the drugs were given to every obese American, it would cost around $1trn. Health insurers are already pushing back. Eli Lilly has taken the unprecedented step of setting up a telehealth service to help patients access the drugs, but even with this in place, it is unlikely to end obesity overnight.

Other providers have drugs in the making. Blades says the focus for this second wave is on creating a drug that can be taken in pill form and loses some of the side-effects of the original drugs (such as nausea). Pfizer’s once-a-day obesity pill Danuglipron is due to be released in the first half of 2024, while AstraZeneca is paying up to $2bn to license a diabetes and weightloss pill from China’s Eccogene. Roche has bought obesity-drug developer Carmot Therapeutics to give it a stake in the sector.

Obesity was not the only hard-to-abate condition that saw breakthroughs in 2023. Hughes also highlights the developments in Alzheimer’s drugs, adding: “The uptake of these drugs is important for investor sentiment and next year we get a look at whether patients are adopting and staying on these drugs as expected.” Two drugs are in progress: lecanemab was recently approved in the US and Japan. A second drug, donanemab, is expected to follow this year.

It is a fertile moment for the healthcare industry more generally. Woody Stileman, managing director, business development at biotechnology specialists RTW says: “For most of medical history there were three modalities – small molecules (pills), proteins and antibodies. In the last 10-15 years, there have been at least a 3x increase in the number of modalities that have been approved by the US Food and Drug Administration as technologies upon which we can develop more innovative drugs.

“The potential for us to develop amazing new drugs and therapies on top of those new modalities is hugely exciting for the next 10 or 20 years. It should be a golden age of innovation.”

In particular, he highlights developments around MRNA technology and in cancer treatment. MRNA technology came to the fore in the rapid development of a Covid vaccine, but has widespread uses. Moderna, for example, is developing treatments for cancer, flu, Zika, and HIV through its MRNA technology. Immunocore, one of the holdings in the RTW Biotech Opportunities portfolio, is developing cancer treatments based around T-cell receptors. These treatments may ultimately offer an alternative to chemotherapy for some cancers. The group already has a melanoma treatment.

There are also macroeconomic factors that may support healthcare in the year ahead. Hughes says a weaker economic outlook could lead to a short-term increase in healthcare demand, particularly in the US, if patients perceive a higher risk of losing their jobs and therefore their employer-funded health care benefits.

He adds: “On valuation, healthcare stock valuations look to be generally in line with the long-term average, but current expectations are that healthcare growth will outpace the broader equity market, which suggests the risk/reward dynamics could be quite attractive at present.” For biotech, valuations are even more attractive, following a prolonged bear market and a pick-up in M&A activity.

Healthcare is a sector with a lot going on, and where some of the potential doesn’t appear to be appreciated by a market that has been narrowly focused on other growth areas over the past 12 months. It could be a sector to watch in the year ahead.

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