(Bloomberg) -- After falling off their perch in the last few months of 2024, European healthcare stocks head into a new year facing the jeopardy of US politics and high-stakes trial results for new drugs.
Key for investors will be clarity on American healthcare policy after president-elect Donald Trump’s nomination of health officials, including a prominent vaccine skeptic, sparked a selloff that reduced the sector from a top performer to middle-of-the-pack mediocrity.
The Stoxx 600 Health Care Index, as recently as September the year’s best-performing European sector, has tumbled 12% since hitting a record high at the end of August. Key to that has been a partial unwinding of Novo Nordisk A/S’s stratospheric stock gains and a slump in AstraZeneca Plc amid compliance questions in China.
The US political landscape “could have a big impact, at least in terms of sentiment,” Gregoire Biollaz, senior investment manager at Pictet Asset Management, said in an interview. “In terms of fundamental changes, are we going to see something happening through the course of 2025? There is still a lot of uncertainty associated with that, while healthcare systems are inherently challenging to modify.”
The peer-beating runup for health stocks was partly down to their attraction as a defensive shelter from Europe’s gloomy economic backdrop, while the frenzy around weight-loss drugs pushed up valuations. But momentum has since stalled as investors grew concerned about the policy outlook in the US.
Europe’s six biggest pharmaceutical companies by market value generated between roughly 40% and 55% of their revenue from the US last year, according to data compiled by Bloomberg. Emily Field, an analyst at Barclays Plc, sees a “more challenging outlook” for the European pharma sector going into 2025. For HSBC Bank Plc analysts including Rajesh Kumar, “none of the economics of drug development stacks up if one removes the US from the equation.”
Trump’s choice last month of Robert F. Kennedy Jr. to lead the Department of Health and Human Services sparked alarm in the healthcare industry and prompted a slump in vaccine and pharma stocks, both in the US and Europe.
“Investors should brace for continued volatility as we head into 2025,” Andy Acker and Dan Lyons, portfolio managers at Janus Henderson Investors, said on the asset management firm’s website. “We also think now is an opportune time to focus on companies advancing the standard of care for patients or improving outcomes and efficiencies for the healthcare system.”
JPMorgan Chase & Co. analysts see concerns over the impact of the new US administration on the European pharma sector dissipating through 2025. Any impact on government-funded vaccines or pharma pricing is limited, “which could also modestly help the sector multiple,” they said in a note.
Beyond the political landscape, analysts see trial results for drugs in development as a focus next year, particularly as companies count down to the loss of patent protection for some of their key medicines. Novo Nordisk, AstraZeneca and Novartis AG have “the most pipeline newsflow and with the highest probability of success,” according to the JPMorgan analysts. By contrast, they see “limited newsflow” for GSK Plc and don’t expect next year’s readouts for Roche Holding AG’s new medicines to be successful.
Roche on Thursday said its experimental Parkinson’s disease drug failed in a clinical trial, potentially signaling the end of a compound that most analysts had viewed as a high-risk, high-reward project.
The outcome of key trial results across the sector — particularly where success in late-stage studies is uncertain but the sales potential is significant — is set to drive who emerges as 2025 winners, according to Intron Health analyst Naresh Chouhan.
Still, he urges caution. Even with the recent pullback, the Stoxx 600 Health Care Index trades at about 16 times expected earnings, according to data compiled by Bloomberg, roughly 20% more expensive than the broader European benchmark.
“Tread carefully,” Chouhan wrote in a note. “The sector has become very complex very quickly, mainly due to valuations becoming very full and therefore any setback has an outsized impact on share price performance.”
--With assistance from Henry Ren.
(Adds Roche’s experimental Parkinson’s drug in 11th paragraph.)