European healthcare stocks, which had been leading the market for much of 2024, now face significant challenges as they head into the new year. The sector’s recent decline, particularly in the last few months, is partly attributed to concerns over US politics and upcoming high-stakes trial results for new drugs.
Earlier this year, European healthcare stocks, especially those in the Stoxx 600 Health Care Index, were outperforming other sectors. However, since their peak in late August, the index has dropped by 12%. This decline was partly driven by a sharp pullback in Novo Nordisk’s stock after a period of extraordinary gains, as well as concerns surrounding AstraZeneca due to compliance issues in China.
One key factor weighing on the sector is uncertainty about US healthcare policy. The nomination of health officials by president-elect Donald Trump, including a vaccine skeptic, has already caused a selloff that knocked healthcare stocks from their previous leadership position to a more middle-of-the-road performance. With the US accounting for a significant portion of revenue for Europe’s top pharmaceutical companies—ranging from 40% to 55%—changes in American healthcare policy could have a large impact on investor sentiment. However, fundamental changes in US policy are still highly uncertain, as healthcare systems are notoriously hard to modify.
For many investors, healthcare stocks had previously been an attractive defensive play amid Europe’s grim economic outlook. In addition, the hype surrounding weight-loss drugs had pushed valuations higher. However, this momentum has slowed, with concerns over US policy now taking center stage.
The healthcare sector’s heavy reliance on the US market is evident in the financial reports of Europe’s top six pharmaceutical companies, which rely heavily on American revenue. Barclays analyst Emily Field anticipates a “more challenging outlook” for European pharma as the year progresses. Likewise, analysts at HSBC, including Rajesh Kumar, emphasize that the economics of drug development would be severely impacted without the US market.
The healthcare industry was further rattled by the nomination of Robert F. Kennedy Jr. as head of the Department of Health and Human Services by president-elect Trump. Kennedy, a well-known vaccine skeptic, sparked a sharp decline in vaccine and pharma stocks in both the US and Europe.
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Looking ahead to 2025, analysts at Janus Henderson Investors predict ongoing volatility in the healthcare sector. However, they suggest that investors could focus on companies that are working to improve patient care and healthcare efficiencies, which could offer better long-term prospects. In the meantime, JPMorgan analysts are optimistic that the concerns over the new US administration’s impact on European pharma will begin to ease as 2025 progresses. They believe that any government actions affecting vaccine funding or drug pricing will likely have a limited effect on the sector.
Beyond political uncertainty, the coming year will also focus on clinical trial results for several drugs under development. Companies like Novo Nordisk, AstraZeneca, and Novartis are expected to see significant news flow from their drug pipelines, with the highest probability of success in upcoming trials. Meanwhile, analysts anticipate fewer significant developments for companies like GSK and Roche, with limited expectations for positive outcomes from Roche’s new medicines.
The results of these trials, particularly those in late-stage studies where success is uncertain but potential sales are high, will play a pivotal role in determining which companies will emerge as winners in 2025. However, caution is advised. Despite the recent downturn, the Stoxx 600 Health Care Index is still trading at approximately 16 times expected earnings, which is around 20% more expensive than the broader European market. Given these elevated valuations, even a minor setback could significantly affect stock performance.
In light of these complexities, Intron Health analyst Naresh Chouhan recommends careful consideration before investing in the sector. With valuations stretched, any downturn could have an outsized effect on healthcare stocks.