SUMMARY

A challenging ending to a volatile year. December was the healthcare sector’s worst month of the year. The murder of Brian Thompson, CEO of UnitedHealthcare, shocked the sector to its core. Novo Nordisk released the much-anticipated phase III data for CagriSema which missed market expectations, and the stock fell sharply. At the eleventh hour, the politicians on Capitol Hill managed to agree on a temporary budget and avoided a government shutdown. Healthcare spending naturally came under scrutiny in these discussions. Lastly, the FED’s hawkish comments and revised outlook for 2025 had a negative effect on equities, particularly on small to midsize companies.

MONTHLY COMMENT

A negative shift in sentiment for the healthcare sector in general and managed care in particular, followed the killing of Brian Thompson. Many of the reactions to the murder on social media were both cruel and inhumane and filled with false, misleading information. The comments largely revolved around the idea that the profits generated by managed care companies were achieved by denying care, or at least by making it difficult for patients to receive help when they needed it the most. It became blatantly obvious in the online discussions that there was a high level of frustration and anger towards the healthcare system in the US which has become uncertain, complicated, expensive, inefficient and at times unfair. In our view, Brian Thompson was an American success story, a brilliant business executive and a dedicated father of two. In meetings with investors, he was always positive with a can-do-attitude, often with a portion of humour to disarm difficult discussions.

A complex reality in American health insurance

Brian Thompson represented the American health insurance and pharmaceutical benefits industry which sits across the table and negotiates prices with hospitals, pharmaceutical companies and healthcare providers striving to maximize payments for procedures, treatments, examinations and medications. Without tools such as prior authorizations, which aim to minimize unnecessary procedures, healthcare spending would rise dramatically, and patients’ premiums would skyrocket. Few people realize that it is frequently their employer, not the insurance companies, that limit access through prior authorizations. It is estimated that waste, fraud, abuse and bureaucracy account for 25 to 30 percent of total healthcare spending. Naturally, cutting this percentage is at the top of the insurance companies’ agendas. Malpractice lawsuits which can end in multimillion dollar payouts are another element in the American healthcare system which contributes to higher spending. Brian Thompson will be remembered as an innovative and warm person. He was a positive agent of change in an industry, which despite its flaws, plays an integral role to finance and distribute healthcare for millions of Americans.

Intense budget negotiations in Congress

In the middle of December, a bi-partisan proposal to avoid a government shutdown was presented in Congress. Elon Musk, the eccentric billionaire and confidant of president-elect Donald Trump, was against the proposal, arguing that it included too many concessions to the Democrats as well as unnecessary spending items. Musk’s criticism on social media made Republicans Congress members tremble and finally pull the proposal. A shutdown did indeed seem imminent at that stage. However, after tough negotiations, a temporary budget which will fund the federal government until March 2025, was agreed. Investors’ immediate reaction to the political vitriol was to decrease their exposure to the healthcare sector, as healthcare spending makes up such a large amount of the federal budget.

Hawkish tone from the Fed finished the year

Despite the rate cut of 25 bps in December, the Fed’s tone was clearly hawkish. Chairman, Jerome Powell, indicated a more cautious stance going into 2025, with fewer cuts than previous estimates had indicated. As a result, US treasury yields increased, which negatively affected the sentiment for small and midsized companies, particularly those in need of external capital, such as companies within the biotech sector.

Trump’s nominations and the healthcare sector

Donald Trump appointed a new chairman for the Securities and Exchange Commission (SEC), the Federal Trade Commission (FTC) and the antitrust department at the Department of Justice (DOJ). Andrew Ferguson will take on the FTC and is expected to be more business-friendly compared to the current head, Lina Khan. There is a strong appetite for mergers and acquisitions in the healthcare sector given the looming patent cliffs and the need for pharmaceutical companies to refill their pipelines.

REFLECTIONS FROM THE MANAGERS

The organization, the financing, the incentive structure, and the accessibility of the healthcare system in the US are far from optimal. This debate is not new, in fact it is probably decades old. However, in our view, major reform of the system is not likely in the next five to ten years.

American healthcare is highly respected internationally, with a high level of production and quality. It offers specialized, advanced, and highly innovative care which is probably among the best in the world; that is, when it works as it should, and for those who are insured. A single payor system is highly unlikely, and there is widespread public scepticism towards such a system. Any reforms would therefore most probably be introduced gradually. Of course, changes could be introduced faster, but any immediate major reforms ought to be seen as unlikely. They would be viewed as almost sensational. However, the investor community is currently focused on the fact that most experts and many politicians seem to agree that healthcare spending is too high, and that now is the time to save money. It is seen as a given that healthcare money will be tight when cutting the deficit is in focus.

Likely cuts in upcoming budget

The reconciliation budget which will be negotiated and agreed by March, only requires a simple majority in the Senate. The budget will likely include cuts in healthcare spending and changes to the Pharmaceutical Benefit Managers system, which could mean a changing playing field for the healthcare supply chain. This reform, which largely relates to demands for a higher degree of transparency, could be detrimental to the profit margins for the pharmaceutical distribution chain. It is, however, not likely that it would hinder these companies’ important role in controlling pharmaceutical utilization to save money and to limit the usage of expensive treatments to intended and best use.

Federal spending to the states to cover Medicaid, the medical care system for those with the lowest incomes, will likely be cut (for example by lowering the increase of such expenditures over time) as well as the letting the subsidies to the ACA Exchanges lapse. We are convinced that any major cuts within healthcare would reduce the prospects, or even make it impossible, for the Republicans to retain their majority of the House of Representatives in the 2026 mid-term elections. The possibility to introduce reform going forward, for example in line with proposals from DOGE, the advisory body run by Elon Musk and Vivek Ramaswamy, is largely dependent on a continued Republican majority of the Congress.

Historically low allocation towards healthcare

The stock market allocation towards healthcare is currently at historically low levels, just over 10 percent. Valuations are lower than the global stock market (P/E 17 compared with world index P/E 19 for 2025), despite the fact that the profit growth for the coming year will be higher, according to consensus estimates. To summarize, the view from the starting blocks for 2025 could look a lot worse. Right now, large cap technology stocks are stealing most of the limelight. We could be in for a broadening of the stock markets’ performance in the coming year if and when earnings growth prospects for the Magnificent Seven decline. The healthcare sector should, in our view, have good opportunities to participate in such a scenario following a difficult year despite good fundamentals. The uncertainty regarding the details of the new budget, and the political processes involved, plus the upcoming trade policy, are likely to affect the stock markets just as much as short-term inflation numbers, interest rates and the economic outlook. However, there ought to be room for positive surprises ahead in terms of good earnings reports, M&A activity and promising clinical data for more efficient and better treatments of severe diseases. The healthcare sector will surely continue to grow over a long period of time. We believe there will be some rather interesting opportunities to buy after the pretty sharp correction we have recently seen.