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While healthcare has underperformed the broader market, Julien Nono-Womdim, VP, Portfolio Research at TD Asset Management tells MoneyTalk’s Greg Bonnell there may be pockets of opportunity.
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There's been a lot of excitement in the healthcare space around weight loss drugs. But investors may be surprised to learn that healthcare stocks, they've lagged the broader market. Joining us now to discuss whether the trend will change and the potential opportunity, Julien Nono-Womdim, VP for Portfolio Research at TD Asset Management. Julian, welcome back to the program.
Hi, Greg. Thanks for having me. You're right, it is surprising. Health care has underperformed the broader market on a year-to-date basis, down 200 to 300 basis points relative to the S&P 500 on a year-to-date basis. And if we extend that time frame over the last year, the healthcare sector has underperformed by about 10%.
What is going on? This is the thing, right-- we have seen the headlines, the weight loss drugs stirring so much excitement out there. But health care is a pretty big basket. So when we talk about that underperformance, what are we really talking about?
Yeah, I think it's important to step back and think about what the market is. And the way I like to think about it is the market is like a marathon, except it's an infinite one. And therein, you have companies, industries, sectors that compete for performance.
And so right now, the healthcare sector is kind of at a standstill. Last year, earnings were down about 15%. This year, earnings are going to be about flat, so not running fast at all. In comparison, the technology sector and other parts of the market have been growing their earnings quite substantially. So, on a relative basis, not running as fast as it should. And, therefore, the relative underperformance is a reflection of that.
So that's carving up the healthcare space into the different names-- weight loss drugs, pharma, developers. Just one part of the pockets of opportunity, I guess, out there. Let's start with medtech.
Yeah. Yeah. And so you're right. Health care is broad. There are different parts of the market. The way I like to think about it is pharma, biotech, the companies that make drugs, the medtech companies, those that make medical devices-- you have life sciences companies, those that make the equipment for drug manufacturing and, of course, the services companies-- hospitals, insurers, et cetera.
And within the broader sector, there are parts that are doing relatively well. And that goes back to my analogy about running. Companies that are able to run faster than the market are being rewarded.
Let's take a company like Intuitive Surgical. They recently launched the fifth generation of their Da Vinci robot. Earnings are growing at a rapid pace. Procedure volumes are very strong. And the stock's up substantially relative to the market, both on a year-to-date basis, on a one-year basis.
That's just one example. But there are other examples of companies in medtech and other parts where innovation, leading to demand, therefore leading to earnings growth is being rewarded.
Is medtech one of those spaces, too, where it's a bit of a demographic play? I'm thinking as I get older, my knees don't feel as good as they used to. And maybe at one point, some robot's going to go to work on me.
Well, I think it's not just medtech. It's the broader healthcare ecosystem. I talked about this marathon analogy. Well, over the short term, the market rewards companies that are running the fastest. Over the long term, the market rewards companies that can run the longest, OK?
And so health care, you're right, has secular tailwinds. Every day in the United States, 10,000 people turn 65. And you're right, people need hip replacements. They need knee replacements. There's a lot of innovation going in cardiology, which is benefiting a company like Boston Scientific.
And so, over the long term, health care can continue to run. And I think the question that investors need to ask is, can the tech sector or the Magnificent Seven, can they run a marathon at a sprinting pace? Because they've been sprinting over the last 12 months or so.
Very interesting stuff. So medtech, some opportunities, perhaps, in there. What about the life sciences space? How do we think about these names?
Well, the life sciences space is quite interesting. It's interesting for two reasons. First, these are the companies that make the equipment used to manufacture drugs. They help with drug discovery. They also make consumables for diagnostics. So when you go into a hospital, you need to get tested for something, they provide a lot of those consumables.
And the industry has gone through some challenges in the last couple of years-- namely, during COVID and subsequently thereafter, there was a lot of inventory stocking of these different consumables, number one. Number two, back then, the biotech funding environment was so strong that the equipment demand was also strong. Another dynamic was that China life science equipment demand was also very strong.
All those things have receded. We've gone through an inventory destocking. Biotech funding has been soft over the last year or two. It's coming back, slowly but surely. And China economic growth has been a bit a bit slow. So all those headwinds are starting to fade, and the industry is starting to show signs of life.
We're seeing with companies like Thermo Fisher and Danaher that their order books are improving. The inventory destocking appears behind them. And, more importantly, global growth seems like it may be picking up.
Picking up because, obviously, there's been concern-- I think through the whole summer, everyone keeps shifting back and forth of, are we headed for a soft landing or a hard landing? Is global growth slowing? Or are we holding in steady?
Apart from all those concerns about the broader global economy and the domestic economy, when we talk about health care, are we thinking they're defensive names? Or is it the same thing when we dig below the surface and there's different pockets?
There's different pockets. Broadly speaking, the sector is defensive. It's defensive because, irrespective of the economic environment, if you and I get sick, we have to go to the hospital. We need to get tested for various-- you need to go through various diagnoses. And so I think that adds a level of resilience, irrespective of the environment.
Nonetheless, there are going to be pockets that are going to be more cyclical. And the life sciences, a bit more cyclical. Pharma, a bit less cyclical. Overall, the sector is less cyclical than the broader market.
Is that the risk there, the cyclical forces at play in some parts of it? If someone's looking at the healthcare space, what do they need to weigh out in terms of risk?
Well, they need to weigh out a couple of things. First, on the pharma side, they need to weigh out the loss of exclusivity on drugs, right? And that's a big headwind for a lot of pharma companies. On the medtech side, they need to weigh out, effectively, competition. Because the way doctors operate is they typically try to choose the best alternative when it comes to a procedure.
And so if a company makes a heart valve or designs a heart valve that is superior to one of the incumbent, the incumbent loses market share very, very rapidly. And, in fact, we see that all the time. On the life sciences side, you're right-- I think part of it has more to do with the economic cyclicality.
If the economy slows down, that part of the healthcare space will be negatively affected. I'd say overall, though, the industry is more resilient to the economy. And, to your earlier point, there are secular tailwinds that are driving continued demand for health care.
And so is this an industry that I think can continue running at a sustained pace for a very long time? The answer is "yes." Will it be ahead of the market on any given year? Evidently not. [AUDIO LOGO]
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There's been a lot of excitement in the healthcare space around weight loss drugs. But investors may be surprised to learn that healthcare stocks, they've lagged the broader market. Joining us now to discuss whether the trend will change and the potential opportunity, Julien Nono-Womdim, VP for Portfolio Research at TD Asset Management. Julian, welcome back to the program.
Hi, Greg. Thanks for having me. You're right, it is surprising. Health care has underperformed the broader market on a year-to-date basis, down 200 to 300 basis points relative to the S&P 500 on a year-to-date basis. And if we extend that time frame over the last year, the healthcare sector has underperformed by about 10%.
What is going on? This is the thing, right-- we have seen the headlines, the weight loss drugs stirring so much excitement out there. But health care is a pretty big basket. So when we talk about that underperformance, what are we really talking about?
Yeah, I think it's important to step back and think about what the market is. And the way I like to think about it is the market is like a marathon, except it's an infinite one. And therein, you have companies, industries, sectors that compete for performance.
And so right now, the healthcare sector is kind of at a standstill. Last year, earnings were down about 15%. This year, earnings are going to be about flat, so not running fast at all. In comparison, the technology sector and other parts of the market have been growing their earnings quite substantially. So, on a relative basis, not running as fast as it should. And, therefore, the relative underperformance is a reflection of that.
So that's carving up the healthcare space into the different names-- weight loss drugs, pharma, developers. Just one part of the pockets of opportunity, I guess, out there. Let's start with medtech.
Yeah. Yeah. And so you're right. Health care is broad. There are different parts of the market. The way I like to think about it is pharma, biotech, the companies that make drugs, the medtech companies, those that make medical devices-- you have life sciences companies, those that make the equipment for drug manufacturing and, of course, the services companies-- hospitals, insurers, et cetera.
And within the broader sector, there are parts that are doing relatively well. And that goes back to my analogy about running. Companies that are able to run faster than the market are being rewarded.
Let's take a company like Intuitive Surgical. They recently launched the fifth generation of their Da Vinci robot. Earnings are growing at a rapid pace. Procedure volumes are very strong. And the stock's up substantially relative to the market, both on a year-to-date basis, on a one-year basis.
That's just one example. But there are other examples of companies in medtech and other parts where innovation, leading to demand, therefore leading to earnings growth is being rewarded.
Is medtech one of those spaces, too, where it's a bit of a demographic play? I'm thinking as I get older, my knees don't feel as good as they used to. And maybe at one point, some robot's going to go to work on me.
Well, I think it's not just medtech. It's the broader healthcare ecosystem. I talked about this marathon analogy. Well, over the short term, the market rewards companies that are running the fastest. Over the long term, the market rewards companies that can run the longest, OK?
And so health care, you're right, has secular tailwinds. Every day in the United States, 10,000 people turn 65. And you're right, people need hip replacements. They need knee replacements. There's a lot of innovation going in cardiology, which is benefiting a company like Boston Scientific.
And so, over the long term, health care can continue to run. And I think the question that investors need to ask is, can the tech sector or the Magnificent Seven, can they run a marathon at a sprinting pace? Because they've been sprinting over the last 12 months or so.
Very interesting stuff. So medtech, some opportunities, perhaps, in there. What about the life sciences space? How do we think about these names?
Well, the life sciences space is quite interesting. It's interesting for two reasons. First, these are the companies that make the equipment used to manufacture drugs. They help with drug discovery. They also make consumables for diagnostics. So when you go into a hospital, you need to get tested for something, they provide a lot of those consumables.
And the industry has gone through some challenges in the last couple of years-- namely, during COVID and subsequently thereafter, there was a lot of inventory stocking of these different consumables, number one. Number two, back then, the biotech funding environment was so strong that the equipment demand was also strong. Another dynamic was that China life science equipment demand was also very strong.
All those things have receded. We've gone through an inventory destocking. Biotech funding has been soft over the last year or two. It's coming back, slowly but surely. And China economic growth has been a bit a bit slow. So all those headwinds are starting to fade, and the industry is starting to show signs of life.
We're seeing with companies like Thermo Fisher and Danaher that their order books are improving. The inventory destocking appears behind them. And, more importantly, global growth seems like it may be picking up.
Picking up because, obviously, there's been concern-- I think through the whole summer, everyone keeps shifting back and forth of, are we headed for a soft landing or a hard landing? Is global growth slowing? Or are we holding in steady?
Apart from all those concerns about the broader global economy and the domestic economy, when we talk about health care, are we thinking they're defensive names? Or is it the same thing when we dig below the surface and there's different pockets?
There's different pockets. Broadly speaking, the sector is defensive. It's defensive because, irrespective of the economic environment, if you and I get sick, we have to go to the hospital. We need to get tested for various-- you need to go through various diagnoses. And so I think that adds a level of resilience, irrespective of the environment.
Nonetheless, there are going to be pockets that are going to be more cyclical. And the life sciences, a bit more cyclical. Pharma, a bit less cyclical. Overall, the sector is less cyclical than the broader market.
Is that the risk there, the cyclical forces at play in some parts of it? If someone's looking at the healthcare space, what do they need to weigh out in terms of risk?
Well, they need to weigh out a couple of things. First, on the pharma side, they need to weigh out the loss of exclusivity on drugs, right? And that's a big headwind for a lot of pharma companies. On the medtech side, they need to weigh out, effectively, competition. Because the way doctors operate is they typically try to choose the best alternative when it comes to a procedure.
And so if a company makes a heart valve or designs a heart valve that is superior to one of the incumbent, the incumbent loses market share very, very rapidly. And, in fact, we see that all the time. On the life sciences side, you're right-- I think part of it has more to do with the economic cyclicality.
If the economy slows down, that part of the healthcare space will be negatively affected. I'd say overall, though, the industry is more resilient to the economy. And, to your earlier point, there are secular tailwinds that are driving continued demand for health care.
And so is this an industry that I think can continue running at a sustained pace for a very long time? The answer is "yes." Will it be ahead of the market on any given year? Evidently not. [AUDIO LOGO]
[MUSIC PLAYING]
