Next year, it's important to keep an eye on the major health sector trends.

• Medicare drug price negotiations starting in February could keep the spotlight on high prescription drug costs, which tend to negatively impact healthcare performance during presidential election years.
• Despite being beaten down, the health care sector is expected to continue its gains in 2024.
• Diabetes device manufacturers Insulet, Dexcom, and Abbott Labs are predicted to excel, according to analysts.

The biotech and medical device makers have experienced the greatest rebound in the health-care sector during the December market rally, and analysts predict that this trend will continue in the new year.

The sector's future in 2024 is uncertain, with analysts and strategists holding differing opinions.

According to Sam Stovall, chief investment strategist at CFRA, the market is beginning the year as an underweight. There is significant overhead resistance that must be overcome, as many investors may choose to exit and pursue opportunities with better growth potential.

The JPMorgan health-care conference in San Francisco, which takes place during the second week of January, could see significant developments from health-care companies. This conference, one of the largest gatherings of major industry CEOs, typically features updates on earnings guidance and clinical trial research.

The S&P 500 health-care sector has underperformed in four of the last six presidential cycles, and increased regulatory focus on drug prices could result in another year of lagging performance.

The S&P 500 health-care sector is expected to experience a second consecutive annual loss, with Covid vaccine makers and falling more than 40% for the year. On the other hand, the sector's largest gainer, up more than 55% for the year, is driven by demand for its diabetes and obesity drugs.

In 2024, which parts of the health industry will continue to face pressure, which will experience relief, and which beaten-down names will investors vote for a rebound next year?

Big Pharma: Price negotiations

The Inflation Reduction Act's drug price negotiations will be a focal point in 2024. Medicare officials will present their initial offers for the first 10 drugs selected for discussions on February 1st.

Dr. Meena Seshamani, deputy administrator and director of the federal Center for Medicare, stated that the law passed should be implemented thoughtfully to create a robust conversation in the health system about ensuring access to innovative therapies that people need.

The pharmaceutical companies have filed lawsuits against the government but have opted to engage in talks, while expressing dissatisfaction with the negotiation process in the US. They contend that American health insurers and pharmacy benefit managers may not transmit the full discounts to patients.

Victor Bulto, president of Novartis' U.S. operations, stated that in a European market, when negotiating a price for a medicine, it is readily available to patients without prior authorizations.

The FDA-approved drug Entresto is among the first to be negotiated for a Medicare discount, which will take effect in 2026.

According to Bulto, the IRA's timeline for making medications eligible for negotiations after nine years on the market may lead to less research on new indications for drugs, including cancer treatments.

Starting with the sickest patients, we investigate the benefit-risk of our molecule and aim to bring data earlier to impact cancer's cause. However, this process requires time, money, and significant investment.

The question for investors is how much of a discount the Biden administration will request from manufacturers. The Centers for Medicare & Medicaid Services will not reveal its final price until September, but drugmakers may choose to disclose it earlier.

Seshamani stated that we are not planning to publicly disclose our involvement in negotiations with individual manufacturers because we are engaged in a back-and-forth negotiation process. However, she noted that if the companies decide to go public, Medicare may also follow suit.

Health insurers: Benefit management risks cool

Pharmacy benefits management divisions, or PBMs, are facing growing regulatory scrutiny. The three largest PBMs, CVS Caremark, Express Scripts, and OptumRx, collectively control nearly 80% of the market for managing pharmacy benefits.

Despite the proposed bipartisan bills in Congress this year aimed at increasing PBM price transparency, none of them were approved by both chambers due to House leadership struggles.

In 2024, it is unlikely that significant regulatory reform events in healthcare will occur during an election year, according to Scott Fidel, a health-care analyst at Stephens.

Bank of America analysts predict that health insurers will have better fundamentals next year, with their top pick being a Medicare insurer poised for significant growth.

BofA analysts wrote in a note to clients that the reported M&A discussion between Cigna and Humana has raised questions about Humana's growth outlook, with Humana walking away from a deal serving as validation of its core growth story ahead.

Sarah James, a Cantor Fitzgerald analyst, believes that health insurers are well-positioned to handle challenges such as rising patient medical costs and changes in Medicare reimbursement next year. Additionally, she sees a buying opportunity if there are any pullbacks during the heated election year rhetoric about health insurance.

James advised that it is best to invest incrementally in the sector during election cycles when there is multiple compression, as it is rare for what is discussed during stump speeches to actually come to fruition.

Medical devices: GLP-1 pressure lifts

According to Les Funtleyder, portfolio manager of E-Squared health, shares of medical device makers experienced significant losses this year due to the prediction that the growing popularity of GLP-1 receptor agonists would decrease demand for products such as diabetes management tools, knee replacements, and bariatric surgery.

Funtleyder stated that although there were concerns that GLPs would eliminate all procedures, this would not occur. He predicted that medical devices would perform better next year.

Signs suggest the sector may have bottomed in October, as the has surged more than 15% over the past two months. Two of the sector's biggest gainers were insulin pump maker and CGM device maker.

Analysts at Leerink Partners have raised their price target on Insulet to $270 from $231 and boosted their target on Dexcom to $144 from $128. Prescriptions for diabetes devices remain strong, Leerink said in a note to clients.

BTIG analyst Marie Thibault stated that the diabetes players have new products in the pipeline that could drive growth in the upcoming year.

According to Thibault's research note, investors are already anticipating the launch of a 15-day sensor for type 2 diabetes non-insulin patients in Summer 2024. Additionally, CGM maker is also expected to obtain approval for its new glucose wearable in the upcoming year.

Relief for biotech and life science tools

The biotech sector has recovered from its losses for the year with a more than 28% rebound during this month's rally.

The GLP-1 drugmakers, including and , have been experiencing a run-up, leaving them with ample cash to fuel the momentum in 2024, according to RBC analyst Brian Abrahams.

As GLP-1 cash flows may catalyze more M&A in the biotech sector, and efforts to improve upon the shortcomings of leading GLP-1 agents emerge, the biotech sector may benefit more and be less overshadowed in the coming year, according to Abrahams in a client note.

As the Federal Reserve raised interest rates over the past year, smaller biotech firms faced a cash crunch, making it difficult for them to secure funding and invest in capital expenditures. This negatively impacted the life science tools industry. However, some investors anticipate an improvement in the situation next year.

According to Advisor Capital Management portfolio manager JoAnne Feeney, who spoke to CNBC, rates are not expected to increase significantly from their current levels, which will alleviate pressure on high-valuation growth stocks in the future. Additionally, this eases the strain on life sciences tools companies that were negatively impacted by high interest rates. Feeney believes that this relief will begin to take effect.

According to Goldman Sachs analysts, the life science tools sector is expected to experience stronger growth than the overall health sector in the next year, after two years of declining sales growth. The analysts predict that the sector will see a stabilization and a resumption of an upward revenue and earnings revision cycle, which will enable it to outperform the market.

Goldman’s top tools picks for 2024 are , and .