• The healthcare sector had continued momentum in November, with focus shifting from political uncertainty to underlying fundamentals.
• Another strong month for the fund which saw positive contributions from all sub-sectors, with biotechnology making the strongest contribution.
• The fund benefited from the acquisition of Exact Sciences by Abbott.
• While the outlook for the sector overall looks constructive, we acknowledge the risk of so called technical hurdles in the near-term.

Monthly comment

The healthcare sector delivered another strong month in November, both in absolute measures and in its relative performance, amid a choppy broader market. Gains were powered by all sub-sectors with biotechnology again in the lead. Many healthcare investors shifted their focus from policy uncertainties to underlying fundamentals and valuation. Focus stayed on execution, balance-sheet strength, growth outlook and differentiated innovation as investors positioned themselves for the rest of this year and for possible catalysts early next year.

US government reopened

After a record six-week long shutdown, the US government reopened on November 12 following the passing of a stopgap spending bill in the House of Representatives. The crux of the debate which caused the shutdown related to whether or not to extend enhanced subsidies for the Affordable Care Act (ACA, also known as Obamacare) which are due to expire by the end of the year. The Republicans were opposed to any extension. However, more recently, the White House seems to have softened in its stance. A vote on the matter will take place in December. The format of the extension is still being debated; however, we see a 2-year extension as the most probable. If approved, healthcare providers and managed-care organizations would be clear beneficiaries. Likewise, the whole industry would benefit as significantly more people in the US would then be able to access healthcare insurance.

More clarity on drug pricing policies

The month provided more clarity on the drug pricing dynamics in the US. In mid-November, the administration announced two additional Most Favored Nation (MFN) agreements with manufacturers of anti-obesity drugs. These agreements were notable as they were the first to include a Medicare Part D component and specifically covered Eli Lilly’s and Novo Nordisk’s GLP-1 drugs. In essence, for the first time Medicare will now cover obesity treatments, with a cost of USD 245 per month, with copays of no more than USD 50. These deals fundamentally reshape the pricing landscape for GLP-1 drugs while providing strategic benefits to both manufacturers. Both companies also committed to further investments in the US. In exchange, they secured a three-year exemption from tariffs on their pharmaceutical products.

During the last week of November, more clarity on the next round of IRA (Inflation Reduction Act) drug price negotiations also emerged. The negotiations concern drugs whose exclusivity period is approaching or has expired but that have not yet faced generic competition. This will take effect in 2027. Notably, this is the first round to be finalized under the Trump administration and is causing some anxiety within the industry. With a net price reduction of 20-35 percent, the outcome was better than feared and thought to be largely manageable, and could come to serve as another clearing event for the sector.

Deals, deals and more deals

Deals within the healthcare space have risen significantly in the past few months, driven by low valuations, innovation, lower interest rates and, ultimately, the need to strengthen R&D pipelines. Two large acquisitions in the sector were announced in November. On November 9, Pfizer emerged as the winner of the bidding war for the anti-obesity company, Metsera, with Novo Nordisk striking out. Pfizer paid USD 10bn for the company, highlighting the intensified competition for assets with the potential to re-shape the market. On November 20, Abbott announced its intention to acquire Exact Sciences for USD 21bn. The purpose of the acquisition is to give Abbott a scaled, profitable business in the large, attractive cancer screening and precision oncology markets.

Reflections

On the back of increasing clarity on the political and regulatory front, the set-up for the healthcare sector is continuing to improve. We now see signs of broader investment interest in the whole healthcare sector, supported by strong underlying fundamentals and attractive valuations. Outlook commentaries from Q3 earnings presentations were generally positive and many companies continue to enjoy a healthy momentum, creating a solid backdrop for the sector in the near-term.

In recent months, the number of deals has picked up and we sense there is now more of an urgency to pursue deals on the back of better clarity on the policy side, low valuations and the lower interest rate. While many of the deals so far this year have been relatively small, the recent Pfizer and Abbott deals in November indicate that companies are now ready to open their deep pockets. At the same time, the IPO pipeline is building up with several potential listings in 2026. This is altogether positive for the sector since a “strong deal” environment should provide the fuel for continued innovation and growth.

While the outlook for the sector overall looks constructive, we acknowledge the risk of potential technical hurdles in the near-term, especially regarding the biotech subsector which has enjoyed a very strong performance in recent months. The continued strong fundamentals and the growth outlook, together with an active deal environment and attractive valuations, underpin a robust set-up right across the healthcare sector.