March was a volatile month for the healthcare sector, again impacted by the macro-economic and political backdrop. While the sector ended March in negative territory, it held up somewhat better than many other sectors, protected both by its overall low valuation and by its defensive characteristics. The downward trend in the sector was led primarily by Medtech amid fears of tariff rhetoric from Washington DC. The Pharmaceutical sub-sector added to the negative sentiment at the end of the month due to concern firstly about an overhaul of transfer pricing, and secondly regarding potential tariffs targeting pharmaceutical imports. While the Biotech sub-sector continued to be out of favor in general, there was positive rotation to the Healthcare Services sub-sector due to the lack of exposure to tariff and tax uncertainties.

Tariffs, tariffs, tariffs

The rhetoric in March on potential US tariffs created real uncertainty and many investors placed themselves on the sidelines for the time being awaiting more clarity. While the language from the Trump administration was at times harsh, Trump expressed an openness to carve out deals with countries willing to negotiate, albeit that the tariff situation remained opaque. The tariff discussions specifically concerning the healthcare sector hurt sentiment around the Medtech companies in particular since a significant part of their manufacturing occurs outside the US. Medtech companies rely on technical components from China and sub-assembly work in Mexico and Canada, and so tariffs on those countries would likely increase costs across the board.

The Pharmaceutical sector had been viewed as being insulated from potential tariffs until Trump expressed the idea of adding tariffs on transfer pricing, which is widely used in the sector. Transfer pricing strategies are ways of maximizing profits by putting manufacturing plants or registering patents in low tax jurisdictions, and then importing finished goods into the US at a high cost.

While the intention of tariffs may have been to encourage US manufacturing, companies across the sector are unlikely to be able to rapidly redistribute their manufacturing strategies since these projects are often multibillion-dollar projects which run over many years. Some companies with strong US production and innovation capabilities may benefit from a more protectionist trade policy. Eli Lilly recently revealed its new manufacturing effort, dubbed “Lilly in America”, and the Indianapolis drugmaker said it would begin construction this year on four new production facilities in the US. The plan more than doubled what the company had earmarked for domestic manufacturing and clearly pointed to a more US centric strategy.

 Looming budget cuts

During the month, the US congress continued its work to adopt a joint budget resolution by 11th April. This is a critical step towards a new budget. The Republican lawmakers in the House remain targeted on cutting $880 billion over a 10-year period in this part of the budget, and there were few incremental developments regarding the likely impact to Medicaid.

Restructuring of US Human and Health Services (HHS)

Dr. Peter Marks, director of the FDA’s Center for Biologics Evaluation and Research (CBER) announced his resignation in March. His departure probably followed an ultimatum from HHS’s Secretary Robert Kennedy Jr., a known vaccine critic. In his resignation letter, Marks voiced concerns about vaccine misinformation. His resignation raised concerns among public health experts about the future of vaccine regulation and the potential impact on public confidence in immunization programs. This development occurred amid broader restructuring plans within HHS, including layoffs and office closures. The aim was to centralize many functions in efforts to cut costs and run the department more efficiently. We fear however, that a number of senior members of staff may leave, which could cause further uncertainties.

ReFlections from the managers

The persistent political uncertainty undeniably led to widespread frustration across most sectors and, as described above, the healthcare sector was no exception. Only the Healthcare services sector fared relatively well, benefiting in part from its domestic nature and its limited exposure to potential tariffs. At the start of this year, medical technology and large-cap pharma were perceived as safe havens in relative terms; however, they were among the hardest hit by the political headwinds in March.

Over the last quarter, we have engaged in approximately 300 interactions with corporate management teams, and note that larger companies seem better positioned to navigate the prevailing uncertainty.

Forward-looking considerations

Much focus now lies in management commentary during the upcoming earnings season, with particular attention on forward guidance for the remainder of the year. Some factors have already been addressed, such as, foreign currency effects, Medicare Part D Redesign,i.e. the change requiring companies to assume a greater share of costs beyond the federal catastrophic coverage threshold. While the latter is expected to mostly impact first quarter financials, it is possible to see longer-term positive effects, since improved patient affordability could drive increased prescription volumes.

Continued confidence?

So, do we still have confidence in the sector in the medium- to long-term outlook for the healthcare sector amid all this uncertainty? First of all, the healthcare sector remains historically undervalued relative to the broader equity market. Furthermore, last quarter’s earnings season was strong with favorable profit outlooks for 2025 and continued high levels of healthcare utilization. One illustration of the sector’s current undervaluation is that small biotechnology firms are now trading at levels just above cash, compared to a historical multiple of three times cash. Behind the numbers we see a clear qualitative distinction within the subsector, and we continue to see compelling investment opportunities.

A reduction in federal Medicaid funding is anticipated, although this is likely to be offset in part by cost-sharing elsewhere. Meanwhile, regulatory agencies have thus far maintained expected review timelines for new drugs and methods, although it is still too early to fully assess the situation.

While the recent resignation of Peter Marks was concerning, the broader policy stance from the Trump administration toward the pharmaceutical and biotechnology industry has remained largely constructive. Market volatility is expected to persist; however, the revenue outlook for healthcare companies remains robust. That said, elevated tariff burdens could present a headwind to earnings growth.