The Healthcare Outlook: Macro Challenges and Biotech Innovations

0:05Amit Sinha:Asad Haider, equity markets are reaching new heights, but one sector has been lagging behind, healthcare. So what's driving this underperformance and how will upcoming innovations impact future investment opportunities and the sector's outlook? I'm Alison Nathan, and this is Goldman Sachs Exchanges.

0:25Amit Sinha:In today's episode, I'll be speaking with Asad Haider, who leads the team covering the U.S. healthcare sector for Goldman Sachs research. We'll explore the macroeconomic factors and the specific headwinds and tailwinds affecting the industry. Next, we'll turn to Amit Sinha, head of life sciences investing in Goldman Sachs asset management, to discuss how investors are navigating the emerging innovations and risks in this sector. Asad, welcome to Exchanges.

0:50Asad Haider:Thank you for having me.

0:51Amit Sinha:So let's start with the big picture. I'm just looking at my screen. The S &P 500 is at record high levels, but healthcare has not had that performance. In fact, it's substantially underperformed. And if I have my facts right, the healthcare sector's weight in the index has dropped to its lowest point in decades. So let's just start there. What is behind this significant underperformance?

1:15Asad Haider:You're right. Healthcare has really struggled this year, and it's actually struggled for the last few years. It's actually a fifth straight year of healthcare underperformance. And you had this period of outperformance during the COVID years, after which the healthcare sector has rolled over and been struggling since. And your observation on the market cap weighting is the right one. It's healthcare right now commands about 9 % of the S &Ps weight, which is the lowest in about 30 years. So what's going on? I think it's a combination of things. I think there's exogenous factors on the macro, as well as endogenous factors that have to do with sector fundamentals and product cycles, et cetera.

1:50Asad Haider:So let's unpack each of those things. On the exogenous side, obviously, this is a market that's been captivated by the AI trade. And that's where all the marginal dollars are going. And every other sector, it feels like, has become a source of funds. And healthcare hasn't been spared from that rotation. I think particularly acute for healthcare on the endogenous side, and the reason perhaps it's been more of a rotational source than other sectors, is that there are some fundamental issues. So, for example, earnings revisions for the healthcare sector have been tracking wrong way for about three years now.

2:20Asad Haider:You have had a period of outflows from the sector now for about five years, really since the COVID period, which was a time of a big inflows into the industry. You have had some exhaustion around big product cycles, things like GLP-1s. And obviously, during the COVID pandemic, you had COVID revenues, double revenues of some of the companies that were involved in that. That's no longer the case. There's not a lot of leadership from any of the specific companies, And so that's been lacking. And then on top of that, you've had policy overhangs. And that's really been a big factor that's been driving multiple contraction across the healthcare sector and keeping generalists away.

2:58Asad Haider:And those policy overhangs have to do with both things that are happening in Washington, D.C. in terms of changes to the environment around things like drug pricing and sector tariffs, et cetera, but also regulatory overhangs, big changes at some of the agencies for healthcare, FDA, CDC, NIH, et cetera. So I think the combination of all of those factors have led to this period of severe underperformance. Valuations are cheap, and there's a lot of uncertainty reflected. But the question that we always have to ask ourselves is that valuations obviously end up being a lens and not a thesis. And so what you really need to see as inflection in the fundamentals, I think, for the sector to turn around or something to shift on the macro side, where either tech rolls over and money comes back into healthcare or something else happens.

3:42Amit Sinha:I want to dig into the policy uncertainty a little bit more because it does feel like a big headwind to the sector right now. So you mentioned a few, but what policy specifically are we talking about? And what do they really mean for the sector? There are a couple that stand out that are having a big impact. Yeah, absolutely.

3:59Asad Haider:So, you know, you never really want to have policy uncertainty in a sector or in an area that's already struggling with some of the fundamental headwinds that I talked about. A lot of the pharma industry, for example, is already going to be navigating some severe what we call patent cliffs in the 26 to 2030 period. And into those patent cliffs, what's happened is that the uncertainty from the Trump administration on the policy side on things like drug pricing and trying to normalize the prices of U.S. and OUS prices and this whole concept of most favored nation pricing, etc., things like sector tariffs, they've all become a little bit more acute.

4:35Asad Haider:And I think one thing that's been particularly noticeable this cycle with the Trump administration is that drug pricing, for example, and really health care policy has become very bipartisan. This used to be something that used to be the realm of the Democrats. And now it has been co-opted by the Republicans as an area which is now completely bipartisan. And there's a lot of uncertainty on where drug pricing will go, what kind of downstream effects that's going to have on things like innovation. And I think until you actually see some kind of clarity, that's probably going to remain an overhang.

5:06Amit Sinha:Let me ask you, because we are heading into the winter months here, so let me ask you a bit about vaccines, which has certainly been in the headlines recently. What are the implications of some of the policy shifts we think we are seeing at this point on vaccine distribution and access?

5:22Asad Haider:Yeah, another great question. And so this all gets wrapped into some of the regulatory and policy uncertainty that I was mentioning earlier. And I think vaccines specifically are an area where the uncertainty has been particularly acute for reasons that I think everyone's aware of. So, for example, the head of HHS, Robert F. Kennedy Jr., has had some very unorthodox views on vaccines that have created some uncertainty in those areas. And you've seen things like changes of personnel in the CDC as well as the HHS and the CMS, etc. Some of the supporters of vaccines are no longer in the agencies.

5:54Asad Haider:There's uncertainties around upcoming ACIP meetings that have to do with vaccines. And I think for COVID specifically, there's a big debate about just mRNA vaccines broadly. And so there have been some guideline changes and some new recommendations restricting the populations for which boosters would be required for going into this next COVID season. And there's been some restrictions for the age-based restrictions as well that weren't there in the past. Those are new recommendations. And so there's that on the policy side. I think the bigger question also, the other outstanding question is also, to your point, going into the winter months is on the demand side.

6:29Asad Haider:Like, how is this going to change behavior? Is this working its way into people's ways about thinking about vaccines, where they might say, look, we may not need it this season or maybe ever, right? And you also have some parts of the country, like Florida, recently said that they were taking away all vaccine mandates, not just for COVID, but for every vaccine, which is actually very surprising to see. So there's that uncertainty, right? And then we'll see how that translates into demand, even though the seasonal COVID wave does seem to be picking up. But we'll see how that all plays out in terms of demand and overall vaccine uptake.

7:03Amit Sinha:very interesting. Let me ask you about one other area that has come into focus, which is the cuts to funding. We've seen a lot about NIH funding being cut. And ultimately, we think about healthcare as a sector that is innovating, but it relies a lot on that type of funding. So how will that potentially impact innovation in the sector?

7:23Asad Haider:There's no question that's going to have an impact on innovation and probably already is having an impact on the way large biopharma companies, for example, are thinking about how to spend R &D dollars. I think the funding for the NIH is about$50 billion in any given year. And there is talk now of that being cut by about 40 % under the Trump administration. And so there's no question that's going to have some downstream effect on new innovation and R &D in areas like Alzheimer's and some of the other biotech areas where the industry was looking for funding and needs funding. And so how that plays out remains to be seen, but I think that is an area that continues to be uncertain.

8:02Asad Haider:And it's having downstream effects in some of the areas like life sciences tools, for example, which are the companies that make the picks and shovels for R &D and for pharmaceutical companies. Those stocks have also been struggling for exactly this reason, because a lot of them are exposed to academic funding, government funding, NIH funding. And the cuts that you're seeing there is actually weighing on perception of those end markets over a longer term as well. Right.

8:25Amit Sinha:So far reaching impacts at this point, as you can see. But ultimately, there is still innovation in the sector. So let's be a little bit more positive here. Where are the areas where you see innovation having a positive impact ahead?

8:38Asad Haider:It always comes down to innovation. And one of the nice things about healthcare is that through all this doom and gloom that we just discussed, that there's always opportunities for idiosyncratic stock picking, because there is always innovation. And if you go back, maybe just to zoom out to about 10 ,000 feet, if you go back and look at the history of the pharma industry, for example, Pharma has actually underperformed the S &P for 25 years. And that might sound surprising to a lot of people, but at an index level, the DRG, which is the Pharma Index, has actually lagged. But through that period, there's always been one or two companies that have delivered significant alpha.

9:14Asad Haider:They've outperformed not just pharma, their own peers, but also the broader markets. And the reason is because they've had the innovation. And most recently, you had the GLP-1s and the obesity names like Eli Lilly and Nova Nordisk were leading that charge, and you had a couple of other companies, it's always a couple of companies that lead that. And so that innovation is always going to be there. One of the problems is that the revenue basis of these companies has become so large that you need to see big dollars and big numbers to be able to move the revenue needles. But innovation is going to continue.

9:45Asad Haider:That's the bread and butter of the industry. There's a lot of exciting stuff going on, going back to where the earlier conversation on obesity, for example, The oral obesity pills are going to be a next big blockbuster product cycle that we are watching. We think are going to be a multi-billion dollar opportunity, probably tens of billions of dollars by 2030. And you've got a couple of companies leading that charge. That's a globally scalable, innovative trend that we think is very exciting and one to monitor, even though there's probably going to be some pricing advance there. Oncology, looking for new ways to improve upon the standard of care in cancer treatments is something that a lot of companies are working on.

10:22Asad Haider:And most recently, there's been a lot of efforts to dethrone some of the incumbents in cancer. There's a new innovation around something called PD-1-VEGF-Pi-Specifics, which is basically fusing together two known oncology drugs and trying to see if the combination of those one plus one equals more than two. And so that's something that's capturing a lot of attention right now. Cardiovascular has recently seen a renaissance in innovation in new ways to treat things like heart disease and blood pressure. And then there's always neuroscience, right? Alzheimer's is the holy grail. And if we can get that right, that's going to be a real incredible opportunity.

10:57Asad Haider:But that's been a struggle. But a lot of companies are still working on innovation in that area as well.

11:03Amit Sinha:And what about AI? You mentioned it at the beginning. It's been very buzzy. There's been a lot of talk about how it is going to revolutionize healthcare in this country and in the world. But what are you observing in terms of the impact and the potential of AI for the industry?

11:17Asad Haider:It's a great buzzword, and it's also a great tool for the industry broadly. From an equity investment perspective within healthcare, it's a tough theme to express, even though a lot of companies, pretty much all of the large healthcare companies are talking about using AI in some way, shape, or form. So, for example, streamlining R &D processes, accelerating FDA dossiers and applications, looking for ways to cut costs. In fact, one large pharma company that is presenting at a conference that's ongoing right now, Investor Conference, talked about how their AI efforts have led them to save about$250 million in costs.

11:54Asad Haider:And that's one of the first times we're actually hearing numbers put around these AI efforts. I think the problem is that from a healthcare investor perspective, it's tough to invest in healthcare as an AI play until you actually start seeing real evidence of it moving the needle from an EBIT or an EPS perspective or a revenue perspective in some way, and you haven't seen that yet. There have been a number of smaller biotech companies that have been AI plays. There were a lot of biotech IPOs back in the day that are for companies that branded themselves as AI plays, and those have fizzled out a little bit.

12:28Asad Haider:And I think the issue is a broader one, which is that for the market, there are many easier expressions of the AI trade than there are within healthcare. So AI is something we're watching. It's something that I expect is going to continue to take hold in some of the areas that I mentioned, but I think we're still probably a ways away from it being rewarded from a healthcare equity investor perspective. Interesting.

12:52Amit Sinha:So Asaba, when we put this all together and we look at the headwinds, but also the tailwinds, what is the outlook for healthcare? Will it see a turnaround this year or next?

13:00Asad Haider:You know, Alison, the outlook for the sector broadly at an index level is tough for reasons that we talked about because of the exogenous as well as the endogenous factors. But there's a lot of exciting stuff going on at a company level, certainly. And for example, we see a lot of opportunities in the small cap biotech and the mid cap biotech space where there's a lot of exciting new innovation going on. And recently, actually, over the last, call it four or five months, you actually have seen a resurgence of the XBI, which is the biotech index, and some of the smaller names, because people are starting to recognize that there is a lot of innovation there, number one.

13:36Asad Haider:And number two, that the revenue needles for those companies are, that those companies are small enough where you can actually get paid to play that innovation. You don't have to be betting on these big markets like obesity and oncology and some of the other areas I talked about before. So we're excited about that. There's a lot of opportunities in that space. And even on the larger cap side, we see opportunities in some of the big new product cycles. Oral obesity is one that we mentioned. And then within some of the other areas that I mentioned, cardiology, there's been a real renaissance. There's a number of companies that are very leveraged to that trend.

14:08Asad Haider:Oncology in the new BD1 VEGF by specifics, there's a number of companies that are leveraged to that trend. So we think those are going to be very exciting opportunities. And then even outside of pharmaceuticals, if you zoom out and you look at areas like med tech, there's a lot of good, interesting innovation going on and new product cycles. And so our outlook for those companies is also very positive. So I think a long-winded way of saying that index level performance depends on so many things. So it's hard for me to say whether, okay, now healthcare is going to inflect and just continue to outperform.

14:38Asad Haider:But within that underperformance, I think there's going to be a lot of opportunities at a company level.

14:43Amit Sinha:So opportunities for upside, but selective opportunities.

14:46Asad Haider:Absolutely.

14:47Amit Sinha:Thanks so much for joining us, Asad.

14:48Asad Haider:Thank you for having me.

14:50Amit Sinha:We'll now turn to Amit Sinha, head of life sciences investing in Goldman Sachs asset management, who'll share his perspective on how investors are navigating the innovations and risks in the early stage biotech sector. Amit, welcome to the program. Great to be with you, Alison. Amit, we just talked to Asad about the history of underperformance of the healthcare sector in recent years. But biotech is no exception. It's been in a bear market as well. What's driving some of that on the biotech side? Yeah, I'm going to maybe pull that apart into a few different pieces because there's been a lot that's been happening over the last five years.

15:24Amit Sinha:Let's start with maybe what's going right. So what's going right is, and we've talked a lot about this at GS, us being in this golden era of innovation, and really the innovation hasn't stopped. The breakthroughs that we're seeing in science and technology that are converting into great medicines. Despite the fact that we've been in this correction for years now, we still see that happening in a profound way. What's changed is really there's been a real big shift and a correction in the public markets that's been fueled by, frankly, a little bit of a bubble that we ran into, into 2020 and 2021.

15:59Amit Sinha:And that's had to work itself out. That's working itself out. And frankly, some of this is also just a resetting back to where the market almost had always been. And so just to talk a little bit more about that, what we saw with the enthusiasm in the period from 2017 to 2021, where we had this huge run-up in biotech, is we saw a period of zero interest rates, so free money. We saw a lot of speculation in biotech. We saw the stage of biotech companies that were going public move much earlier than they'd ever gone at much higher valuations. We also saw a bunch of new participants. Biotech is, I would argue, a really long duration, hyper-technical asset class, particularly when you're talking about these early stage names.