INVESTORS WEIGH HEALTHCARE BETS
Stocks may be in for rough summer and fall as US election risks loom
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 United States 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 midterm 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, 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 firms 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 price-to-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 this year, the S&P 500 healthcare sector is down about 0.2 per cent against a 1.4 per cent rise for the broader S&P 500. The health sector lagged in 2016 over concerns of a victory by presidential candidate Hillary Clinton, who made high drug prices an issue in her campaign.
That year, the healthcare sector dropped nearly 10 per cent from August 1 until the November 8 election, versus only a modest overall market drop.
“Elections bring volatility, especially within healthcare,” saidHeupel. “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 shed six per cent and five per cent, 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 per cent this year, with the life science tools and services index up seven per cent, 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 lacklustre 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.