Healthcare investors weigh bets
Wall St Week Ahead US election risks loom
NEW YORK, June 2 (RTRS): If 2016 is any guide, pharmaceutical, biotech and other healthcare stocks could be in for a rough summer and fall heading into another round of US elections.
But investors may be able to hedge such risks while remaining in the sector if they are willing to pay a premium for medical product companies outside the pharmaceutical supply chain.
As with the 2016 presidential election, prescription drug costs could become a hot topic as mid-term US Congressional elections near, inflaming investor concerns that prices for medicines may not be sustainable in the face of government and market pressures.
Just on Wednesday, US President Donald Trump said major drug companies would announce price cuts in two weeks, underscoring how the issue remains in the political spotlight.
Shares of pharmaceutical, biotechnology and other companies in the supply chain will be in the cross-hairs of investor unease over a tougher environment for drug pricing. But given their already sluggish performance, many of those stocks trade at relatively discounted levels and are enticing to investors who believe risks from Washington rhetoric or from the election results already are accounted for in share prices.
Shares of other medical product companies, like makers of heart devices, knee replacements or tools for drug research, present healthcare options shielded from pricing attacks. But those stocks generally trade at steeper valuations, based on priceto-earnings ratios.
“There are opportunities within healthcare that really don’t have much concerns they are going to go after pricing,” said David Heupel, a healthcare analyst with Thrivent Financial.
But, Heupel added, “there certainly is a price to pay.”
So far in 2018, the S&P 500 healthcare sector is down about 0.2 percent against a 1.4 percent increase for the broader S&P 500.
The health sector lagged severely in 2016 over concerns of a victory by Democratic presidential candidate Hillary Clinton, who made high drug prices an issue in her campaign against Trump. That year, the healthcare sector dropped nearly 10 percent from Aug 1 until the Nov. 8 election, versus only a modest overall market drop.
“Elections bring volatility, especially within healthcare,” Heupel said. “I don’t think this will be any different.”
Healthcare stocks briefly rallied last month after Trump unveiled an administration plan to lower drug costs for consumers that avoided aggressive measures. But some analysts say the plan could cause volatility as details become clear.
Overall this year, shares of pharmaceutical and large biotechs have slumped 6 percent and 5 percent, respectively. Those companies, along with pharmacy benefit managers, drug wholesalers and others in the supply chain, comprise over half of the sector.
By contrast, healthcare equipment shares overall are up 10 percent in 2018, with the life science tools and services index up 7 percent, although a couple of company stocks have lagged.
Shares of other companies in the sector, such as health insurer Humana and lab-testing company Quest Diagnostics , have also climbed this year.
“In the healthcare space, it really depends on where you’re allocated in terms of success,” said King Lip, chief investment strategist at Baker Avenue Asset Management. The San Francisco firm’s holdings include animal health company Zoetis and surgical robot maker Intuitive Surgical.
Analysts also point to lackluster outlooks for much of large pharma and biotech, with company-specific setbacks afflicting Celgene Corp and others, versus strong financial results and outlooks by healthcare equipment companies.
“A lot of the medtech stocks, it’s not just that Washington isn’t targeting them,” said Teresa McRoberts, healthcare portfolio manager at Fred Alger Management. “Fundamentally, a lot of them do have interesting new products,” she said, adding they are beating earnings expectations and raising forecasts.