BMO's Evan Seigerman: More clarity out of the FDA could drive smaller biotech names in 2026

Healthcare Sector Outlook for 2024

Key Concepts:

• GLP-1s: Glucagon-like peptide-1 receptor agonists, a class of drugs primarily used for type 2 diabetes, now increasingly popular for obesity treatment (e.g., Wegovy, Mounjaro).
• Keytruda: Merck’s blockbuster immunotherapy drug, facing eventual patent expiration and revenue decline.
• M&A: Mergers and Acquisitions – consolidation activity within the pharmaceutical industry.
• FDA Consternation: Concerns regarding operational challenges and potential delays within the Food and Drug Administration.
• Pipeline: The collection of potential drug candidates a pharmaceutical company is developing.
• Multiple Compression: A decrease in the price-to-earnings ratio of a stock, often due to concerns about future growth.

Sector Performance & Regulatory Landscape

The healthcare sector experienced significant volatility in 2023, hitting a low in September before recovering in the latter half of the year. This recovery was largely attributed to a perceived easing of concerns surrounding proposed pharmaceutical tariffs ("Liberation Day") and proactive engagement by pharmaceutical companies with the administration to ensure product access. The initial fear of tariffs “destroying the sector” did not materialize. A key question now is identifying investment opportunities beyond the GLP-1 market, despite the recent approval of Novo Nordisk’s oral pill. There are ongoing concerns about operational issues and potential delays at the FDA, which could impact performance, particularly for smaller biotech companies. The cooling of the “AI trade” may also redirect investment towards the pharmaceutical sector.

Obesity Market – A Lasting Trend

The obesity treatment market is expected to remain robust. BMO Capital Markets is “positive on Lilly [Eli Lilly] and neutral on Novo [Novo Nordisk].” While Novo Nordisk’s Wegovy pill approval is acknowledged, it’s not anticipated to significantly improve the company’s position. Eli Lilly is seen as consistently strong in execution. Further consolidation within the obesity treatment space is anticipated, driven by a “scarcity of good assets.” Structure Therapeutics, a company covered by the analyst, is highlighted for its promising recent data and potential as an M&A target.

Legacy Pharma – Merck’s Turnaround

Merck’s stock has experienced a comeback, prompting an upgrade to “Outperform” by BMO Capital Markets. The positive outlook stems from Merck’s efforts to build a diversified portfolio of assets to mitigate the anticipated decline in revenue from Keytruda, its blockbuster immunotherapy drug, as its patent expires. Key assets include promising data from an oral cholesterol drug, strategic M&A activity, and a pipeline of cancer treatments beyond Keytruda, potentially driving growth into the 2030s. The potential for “multiple compression” is acknowledged if Merck fails to address the Keytruda revenue loss.

Mergers & Acquisitions (M&A) Activity

A significant wave of M&A activity is expected to continue within the pharmaceutical industry. The Pfizer-Novo Nordisk situation in November is cited as an example. Large pharmaceutical companies, including Merck, Bristol Myers Squibb, Novo Nordisk, and European firms, are identified as needing to fill gaps in their pipelines through acquisitions. This demand for assets will likely benefit biotech companies with strong data. The analyst states, “If you have a biotech with good data…” it will be an attractive acquisition target.

Notable Quotes:

• “Obesity is here to stay.” – Evan, BMO Capital Markets Head of Healthcare Research, emphasizing the long-term potential of the obesity treatment market.
• “I feel like Lilly is really has been executing on all cylinders, and they’ll continue to do so.” – Evan, highlighting Eli Lilly’s strong performance and future prospects.
• “We’re really starting to see them put together a portfolio of assets to help them get through the looming Keytruda low.” – Evan, explaining the rationale behind the upgrade of Merck’s stock.

Data & Statistics:

• No specific numerical data or detailed statistics were provided in the transcript beyond the mention of the September low and subsequent recovery of the healthcare sector. The discussion is primarily qualitative and focused on market trends and company-specific outlooks.

Logical Connections:

The discussion flows logically from a broad overview of the healthcare sector’s performance to specific areas of opportunity and concern. The conversation moves from the impact of regulatory changes to the dynamics of the obesity market, then to the turnaround story of Merck, and finally to the anticipated M&A activity. Each topic builds upon the previous one, providing a cohesive analysis of the healthcare landscape.

Synthesis/Conclusion:

The healthcare sector, while volatile in 2023, is poised for potential growth in 2024. The obesity market, particularly driven by GLP-1s, remains a key area of focus, with Eli Lilly positioned favorably. Legacy pharmaceutical companies like Merck are actively diversifying their portfolios to address future challenges, such as patent expirations. A significant wave of M&A activity is anticipated as large pharmaceutical companies seek to acquire innovative assets and strengthen their pipelines. Addressing operational concerns at the FDA will be crucial for fostering growth, especially within the smaller biotech sector. The overall outlook suggests a dynamic and evolving healthcare landscape with opportunities for strategic investment and consolidation.