Citi’s 2024 Global Healthcare Conference: Key Debates

As we prepare for our 2024 Citi Global Healthcare Conference in Miami on December 3–5, we review key topics across our collective healthcare coverage.

Key Takeaways:

• GLP-1s are just getting started, with both positives and negatives across subsectors
• Trump 2.0 could have a big impact on Health Tech and Distribution via tariffs, drug pricing changes, and government insurance payor mix implications

• The outlook is generally favorable for M&A and capital raisings, with a few caveats

GLP-1 market still in the early innings

Weight loss of 10% to 15% in non-diabetic populations could drive dramatic uptake of GLP-1 drugs. Based on our conversations with endocrinologists, not all patients are going to need as significant a weight response as is typical from GLP-1 tirzepatide, especially in the overweight category (body mass index between 25 and 30). While we still see a robust market for weekly injectables such as tirzepatide, drugs taken orally could be a “game changer” according to those we spoke to. Orforglipron is being developed by Lilly, with Phase 3 clinical trial data coming in mid-2025, and offers broad commercial potential.

The total addressable market (TAM) for obesity and diabetes is large: We model ~$100 billion by 2030 in aggregate across Lilly’s portfolio (tirzepatide and orforglipron), while the 2030 Bloomberg consensus estimate for Novo Nordisk’s Ozempic and Wegovy is at ~$42 billion. We think this market is still in its nascency, and undervalued by Wall Street.

Ultimately, we see GLP-1 as still in its early innings, with strong script growth and continued debate around availability, a multitude of upcoming potential approvals for indication expansions such as sleep apnea and heart failure, and several other indications — such as Alzheimer’s disease and hypertension — in-clinic or potentially on the docket.

Secondary implications from GLP-1s

Mixed for MedTech

Moving to secondary implications, MedTech investors have dealt for more than a year with questions about GLP-1s’ potential impacts on device utilization and TAMs. But today most of our conversations about GLP-1s are limited to diabetes stocks, a sign that potential headwinds to medical-device utilization have been put into proper perspective. Data about GLP-1s supported a change in the obesity-treatment paradigm, but not a sea change in medical devices used for progressive disease states. That fits our view that GLP-1s might in fact be beneficial in getting patients into surgeries that might not have been possible at higher BMIs.

Ultimately, we see diabetes devices as most exposed to GLP-1 adoption, but don’t anticipate GLP-1 therapies will have any material impact on makers of continuous glucose monitors (CGMs) or insulin pump manufacturers. GLP-1s delay the time to progression of type 2 diabetes, but don’t stop the progressive nature of the disease. Even a delay to insulin therapy still leaves a very large patient pool to transition to adopting insulin pumps. We also see CGMs as remaining an important part of the diabetes-treatment puzzle.

Another area where we’ve heard worries about GLP-1 impacts on device adoption is orthopaedics, with some thinking that patient weight loss might have a negative impact on the number of orthopaedic procedures. But data suggest a potential positive impact: GLP-1s can bring patients back into the surgical pool by lowering BMIs, osteoarthritis isn’t cured by weight loss, and patients who lose weight may become more active, potentially increasing sports-related injuries.

Mostly positive for Health Tech and Distribution

Diversified drug distributors’ revenue and operating income are directly tied to GLP-1 sales, with distributors making money by buying in bulk from manufacturers at a discount and selling to pharmacies and providers at less of a discount. That said, GLP-1s are highly priced branded drugs, making the spread between the buy-side and sell-side discounts very thin, with our estimate at 0.2%. GLP-1s are also more expensive to distribute than typical branded drugs as they require higher-cost cold-chain (temperature-controlled) distribution. This has led to a limited impact on distributors’ operating income.

Looking ahead, GLP-1s will be much more impactful once the supply/demand imbalance starts to correct and new products are introduced, likely starting in 2026 at the earliest. At that point, manufacturers will start to care about the channel and be willing to give up some margin so that low-margin mail distribution doesn’t dominate distribution. On the downside, rapid adoption of GLP-1s could potentially constrain home health markets, significantly reducing the incidence/prevalence of diabetes and obstructive sleep apnea, limiting demand for supplies and equipment.

An IRA refresher — stifling of innovation the biggest concern 

In looking at the impacts of the Inflation Reduction Act (IRA), over the past year we’ve seen the industry accelerate R&D capital allocation away from chemically derived small molecule drugs — comprising most available medications — toward biologics derived from living sources, as well as rare disease areas, vaccines and new therapeutic modalities. For some context on this trend, as we pointed out in an August 2023 report:

The IRA allows the U.S. government for the first time to set price through “negotiation”, beginning in 2026. Small molecules synthesized through medicinal chemistry will be up for negotiation with at least a 25% list price reduction once they have been on the US market for 9 years with larger discounts applied for drugs that have been on the market for longer. Negotiations for biologic drugs can begin after 13 years on the market.

Our analysis points to the Medicare Part D price cuts announced in August and to be implemented in 2026 as baked into consensus. The next round of negotiations is unlikely to be easier given what the government has learned from the first round. Applying these price cuts to the likely 2027 drug list implies group revenue pressures ranging from around 1% to around 10% for affected companies, which we see as a mostly manageable negative. The key debate will be what level of offset (positive for drug manufacturers) emerges from (1) lower rebates, (2) Medicare coverage gap, or “donut hole”, discounts abating, and (3) increased utilization given patient out-of-pocket costs are to be capped at $2,000. But most concerning is the long-term impact of the IRA on innovation.

As for the effects of the U.S. election, Trump has indicated that many aspects of the IRA, including drug price negotiations, could be repealed under his second administration. But we note that he hasn’t been vocal on this topic and his campaign articulated no position on such negotiations. Repealing this aspect of the IRA would be a politically unfavorable move given the support it enjoys among Republican constituents. The Republic party platform lists affordable healthcare and lowering prescription-drug prices as key commitments, and Trump advocated for international reference pricing during his first term.

Post-election implications for Health Tech & Distribution

Sticking with election implications, the Health Tech & Distribution names we cover tend to be well insulated from political vagaries. Within Health Tech, there tends to be bipartisan support for making healthcare more efficient via technology, transparency and new payment modalities. Within distribution, drug utilization is more dependent on demographics and drug innovation than on specific policies.

That said, there are three areas where Trump 2.0 policies could have an outsized impact on our coverage: tariffs, drug pricing and payor mix.

1. Tariffs on China will have the most direct impact on distributors that manufacture private-label products in China or partner with original equipment manufacturers in China to do so. That said, we expect the effect to be minimal given the strengthening of supply chains post-pandemic to avoid being overindexed to one geography.

2. Two potential changes to the IRA — Medicare Part D benefit design changes and Medicare drug-price negotiations — could affect distributors. The IRA’s cap on out-of-pocket costs may encourage increased utilization of high-priced specialty drugs, which would be positive for distributors. On the subject of Medicare drug-price negotiations, lower list prices are generally negative for distributors, whose discounts are based off these prices.

3. Regarding payor mix, Republican administrations have traditionally been positive for Medicare Advantage and negative for Medicaid and Affordable Care Act (ACA) exchanges. Potential policy changes could encourage accelerated Medicare Advantage enrollment, while the granting of more state waivers to impose work requirements for Medicaid eligibility could further constraint Medicaid enrollment. Enhanced ACA exchange subsidies are expected to expire at the end of 2025; not extending them would slow enrollment in the exchanges.

Healthcare could see a pickup in M&A

We expect the Healthcare sector to benefit from economic tailwinds associated with lower interest rates and inflation and the likelihood that few major changes emerge to healthcare policy. The possibility of new leadership at the Federal Trade Commission means we wouldn’t be surprised to see a step-up in business development and M&A activity, particularly for companies in “hot” markets such as metabolic disease, or those with disruptive potential in large therapeutic categories such as Immunology & Inflammation and hematology/oncology.

From the standpoint of Health Tech and Distribution, we expect a more favorable M&A/antitrust environment in 2025, which will lead to moredistributor verticalization (i.e., companies take ownership of the process for greater supply-chain control) and Health Tech consolidation. Distributors have been busy acquiring stakes in management services organization (MSO) assets as they seek to integrate into the profitable community-provider channel, and we think Trump’s victory lessens the probability of antitrust issues here. We also expect distributors to acquire biopharma solutions to better serve upstream partners such as drug manufacturers.

Employers, health plans and providers remain awash in health-tech point solutions and are looking to consolidate their vendor relationships — this underpins our expectations for M&A in that space.

Capital market activity should pick up, too, with some political risk

Capital markets began to see improving sentiment for small/mid-cap biotech late this year with a bout of successfully launched IPOs. Before the election, this seemed to bode well for 2025, but post-election volatility related to Trump’s nomination of Robert F. Kennedy Jr. as secretary for the Department of Health and Human Services adds some risk to the capital-markets outlook, particularly if this volatility extends into the new year. We anticipate that 2025 should deliver an increase in activity in small/mid-cap biotech capital markets; the question is: How much?

Capital markets have dried up for health tech, with only two IPOs and nine follow-ons since 2022. We do expect a meaningful pickup in activity in 2025, but believe the market will still demand profitability or a clear path to it with a demonstrable ability to scale. Newer companies that are further away from profitability will likely find the market less receptive and stay private longer or exit via M&A.

We expect sentiment to improve for Biopharma sector M&A, with IPOs the biggest swing factor: There’s still a backlog of private companies that have been on the back burner heading into 2025, which could spur some momentum in those markets. However, long-term rates are likely higher given potential tariffs and policies that could give rise to inflation; this could make it more difficult for some smaller biotechs to raise capital despite this healthy backlog.

The China outlook — early signs of stimulus impact, but 2025 visibility limited

We see Life Science Tools as the most China-sensitive healthcare sector; much of the recent focus for investors in this sector has been the broader China outlook, with questions about the level of activity seen in the quarter, equipment exposure and the trajectory/timeline of an expected recovery into Trump’s second term.

Details of China’s stimulus program have driven some incremental confidence about its economic recovery; moving closer to year end, some companies have begun to see an increase in requests for proposals, orders and tenders related to the stimulus program, though they remain cautious about fiscal 2025 given prior market volatility and stimulus uncertainties.

We don’t expect a major escalation in trade conflicts via retaliatory tariffs under Trump 2.0. We see Trump’s talk of a 60% tariff as more of a bargaining chip than a real risk, with ~15% a more realistic assumption; this would shave ~1.5% off China’s GDP. If China focuses more on consumer-related stimulus, sentiment could improve along with general economic spend, which could impact Biopharma and Biotech sector sentiment. Life sciences companies broadly manufacture products in China that are sold there, with limited exposure to imports from the U.S.