Portfolio Manager Camilla Oxhamre

Monthly comment

The healthcare sector delivered a positive rebound in August and for part of the month, it was the best performing sector in the S&P 500 index. The sector ended however, the month in fourth place as momentum reversed significantly in the final days of the month due to macro-economic volatility and profit-taking. Within the sector, performance has, however, been highly diverse; for instance, the biotech-focused ETF, XBI, returned 9.6 percent during the month, while the healthcare services sector lagged at negative 2.6 percent, mainly driven by profit taking, post a strong run-up.

Biopharma was the key driver of the sector performance in August, with Moderna and Merck rallying on breakthrough cancer vaccine data. The trial has potential to be one of the most important clinical trials of the decade, which invigorated the whole biopharma sub-sector and pushed it to new highs. Moreover, there have been many other positive updates, including additional M&A transactions, solid earnings and a continuing broadening out of the market participation beyond the tech sector, which altogether made biopharma a logical landing spot for capital flows during the month.

A solid earnings tape and more M&A deals

The second quarter earnings season for the healthcare sector was characterized by resilient top-line growth and earnings beats, particularly within the managed care and pharma segments. Specifically, earnings for the healthcare services sub-sector were generally strong, boosted by low care utilization. The share price performance has, however, been soft lately driven by profit taking on back of strong performance into the numbers and elevated multiples. Moreover, the sentiment for managed care companies has softened going into the October-release of the yearly publication of Medicare Advantage and Part D star ratings by the Centers for Medicare & Medicaid Services (CMS). The ratings are highly impactful on managed care companies’ profitability, generating some nervousness, particularly as the outlook for stars this year is unusually complex due to litigation, plan exits and cut-points uncertainty. The life science tools part of the healthcare services sub-sector has been a bright spot, demonstrating an overall mid-single digit underlying growth for the first time since 2021. This was viewed as an early signal of a long-awaited improving market backdrop driven by biopharma-spending inflection, an improved outlook from the National Institutes of Health and a China-recovery. For medtech, the quarter was marked by a recovery in organic growth across major companies, leading several industry leaders to raising their full-year 2026 outlooks. The overall share price performance was positive, particularly among the small- to mid-cap names, and valuation for the sector, as a whole, has trickled upwards while still trailing well below its five-year average.^[1]

The positive sentiment in pharma and biotech in the second quarter has been above all driven by a dealmaking boom. M&A activity hit roughly USD80bn in cumulative value during the quarter, headlined by four major acquisitions over USD10bn. The pace was record-setting industry-wide and supported a strong momentum in the space.

Moderna and Merck strike gold on cancer-vaccine trial

Moderna and Merck recently announced a landmark milestone in oncology, reporting positive Phase 3 data for the personalized therapeutic cancer vaccine, intismeran, in patients with high-risk melanoma. This represented the first successful global late-stage validation of a personalized mRNA-based cancer therapy. Moderna’s share price soared 177 percent on the news, and combined they added USD92bn in market value. The news also created a ripple effect through the sector (the biotech ETF, XBI, surged almost 6 percent on the day), particularly propelling companies associated with personalized medicine and mRNA-based therapies. Also, diagnostics and life science tools companies saw a positive jolt as secondary beneficiaries. Moderna and partner Merck now intend to file for approval with a launch potentially already in 2027. Moderna is advancing this technological concept also in other tumor indications, such as lung cancer, bladder cancer and renal cancer.

Reflections

This past quarter, the S&P 500 index delivered its strongest quarterly gain since 2020^[2] driven by record-breaking corporate earnings. Indeed, many indices have been hitting new highs. However, we are now facing the inherently more volatile second half, of this US midterm election year, creating a sense of caution. The coming period contains significant political and macro-economic events and catalysts, including the election for which the debate climate is starting to heat up. Combined, this could further fuel the rotation into more defensive names, hence benefiting certain parts of the healthcare sector. That said, it is likely to be volatile.

Federal Reserve Chair, Kevin Warsh, used his debut Jackson Hole Symposium speech to signal a hardline stance on inflation, causing short-term bond yields to jump. While not implying immediate interest hikes, Mr. Warsh stated that inflation remains too high and that the Fed has work to do if the 2 percent target is not reached. A potential step-up in interest rates would primarily hurt the more interest sensitive small-cap universe, including the biotech sub-sector. On the other hand, well capitalized large-cap names, including pharma and managed care companies, could potentially offer a safer place for investors.

A close eye on the bond market

The market is also keeping a close eye on the long-end bond market which increasingly looks like the pressure valve for two of the forces powering the US economy – extraordinary government spending and an AI buildout requiring extraordinary amounts of capital. Consequently, the long-end yields have been hitting multi-decade highs. Equities have, so far, largely absorbed the pressure as earnings have been strong and market participation has broadened beyond the tech sector, but the tension is noticeable.

In November, US voters will head to the polls for the mid-term election. All House members and one-third of the seats in the Senate are up for re-election and hence this election could repaint the political landscape over the next two years. Cost-of-living, including energy prices, housing and Social Security, have dominated the debate with healthcare, so far, playing a more limited role. The healthcare sector is, however, an easy target for easy political points which could add to volatility in the near term. That said, healthcare is an industry with strong national interest, something we were reminded of last year when all the harsh rhetoric against the sector mostly resulted in relatively benign measures. In conclusion, while we may encounter near-term volatility we remain positive on the mid-to-long-term outlook for the healthcare sector supported by strong underlying growth momentum.

^[1] Bloomberg data and Rhenman & Partners calculations, per 31-08-26.

^[2] Bloomberg data and Rhenman & Partners calculations, per 31-08-26.