Opportunities in the ASX Health Care Sector

Despite sharp underperformance, health care remains a sector with compelling long-term potential and shouldn’t be written off. FY25 brought significant challenges, but also revealed signs of resilience, reinvention, and opportunity across key names like CSL and Cochlear. Behind the near-term pressures are strategic shifts and innovations that could drive a stronger growth trajectory ahead.

FY25 was a challenging year for the health care sector, with the S&P/ASX 200 Health Care Index underperforming the S&P/ASX 200 benchmark index by -18.5%. Notable underperformers included Ramsay health care (-33.8% relative) and CSL (-30.8% relative), with Sigma (+126.5% relative after its merger with Chemist Warehouse) and Pro Medicus (+96.4% relative) the outperformers.

CSL: Global Biotechnology Company

CSL has faced several headwinds in recent years: margin pressure in its core plasma franchise (Behring) arising from Covid disruptions; the failure of the CSL112 phase 3 trial; and weaker than expected performance from its recent acquisition of Vifor. This year, further pressures have arisen from potential regulatory changes in the US surrounding tariffs, ‘most favoured nation’ pricing, and risks to volumes and pricing in their Seqirus vaccine franchise.

Whilst these near-term uncertainties have weighed on the stock, the medium-term outlook may be brighter. CSL is investing in a series of operational efficiencies in its core Behring franchise that should extend its structural margin advantage relative to peers. If successful, these initiatives should materially improve plasma economics and increase capacity at minimal incremental cost or capital. These initiatives, combined with the lagged impact of a recovery in volumes post COVID, are expected to deliver double-digit earnings growth and a material expansion in returns over the medium term.

Cochlear

Cochlear’s 1HFY25 result in February was marginally weaker than expected with Services sales (processor upgrades) below both the market’s and the company’s expectations, driven by cost-of-living pressures. FY25 guidance was then lowered in June, again driven by weaker Services performance, although this is expected to return to growth in FY26 with the launch of the Kanso 3 sound processor and improved candidate targeting.

Whilst there has been short-term cyclical weakness, the longer-term story has arguably grown stronger with the launch of Cochlear’s next generation implant and processor, the Nucleus Nexa System. The new implant had been flagged, but the technology change is arguably greater than the market anticipated: it’s the first implant with an integrated sound processing module and memory which opens up a technology gap to peers that will be difficult to close. Some of the benefits of this new system will take time to manifest, but it should be a clear preference for patients given it future proofs a lifelong investment. It should underpin the opportunity for Cochlear to deliver double-digit sales growth into the long term given the size of their addressable markets, product innovation, and investment across the patient pathway.