Healthcare Still a Growth Sector in 2014 Despite Increase in Hedging Costs, Analysts Say

Analysts predict that earnings will soar by 11 percent for healthcare companies, higher than the 7.2 percent increase by the Standard & Poor 500’s Index, and faster than the average for the whole sector, Bloomberg reported.

The forecast came after Q1 earnings of major healthcare stocks surpassed analysts’ expectations, Bloomberg said.

“Suddenly there’s activity and finally pharma companies are getting their strategies straightened out,” Bluecloud Healthcare partner Les Funtleyder told Bloomberg.

“Pharma’s always been a consolidating industry, so we’re going to see more transactions. Tax inversion strategies are all the rage and interest rates continue to be low. Health care is a big growth area,” he said.

Bloomberg noted that the S&P Health Care Index has risen by 4.6 percent this year. As of press time, the group was up by 5.62 percent, according to Bloomberg’s data. Bloomberg also noted that the group currently trades at 19.6 times more than reported revenues.   

Mergers and Acquisitions

Hedging costs rose to an eight-year high despite merger announcements from the biggest healthcare stocks in the wake of the biotech sell-off late in March, Bloomberg said.

Implied volatility, Bloomberg forecasted, has peaked its highest in eight years as the Standard & Poor’s 500 Index soared by 4.6 percent, propelled by gains from M&As from Pfizer, Allergan Inc., Forest Laboratories Inc., and Eli Lilly & Co.

Bloomberg noted that same activities have quadrupled gains for the sector during the same period last year. Stocks have skyrocketed by as much as 84 percent since 2011 due to the $285 billion proposed mergers and acquisitions, Bloomberg said.

Investors were keen on hedging because of the recent healthcare stocks rally and to avoid a possible downdraft the sector’s younger sibling, biotech, suffered during the sell-off, Gareth Powell, a fund manager for UK-based Polar Capital Holdings Plc., told Bloomberg.

The Nasdaq biotech index dipped by 20 percent late in March after peaking in February. Many analysts referred to the downdraft as a “bubble burst,” while some analysts argue that a bubble is far from happening.

Current Areas of Growth

The S&P 500 Health Care Index has outpaced the S&P 500 by 32 percent in two years, with gains reaching a whopping 55 percent,  Wall Street Journal said. The reason the sector grew this much was because of the $21.5 billion investors funneled into healthcare-focused mutual funds and ETFs since early last year, Russolillo noted.

Despite the recent slowdown, a bunch of healthcare stocks continue to provide investors protection.

On the Dow Jones Industrial Average, blue chips like Merck & Co. (MRK), UnitedHealth Group Inc. (UNH), and Johnson & Johnson (JNJ). These stocks were down at the time the report was published, but JNJ has managed to climb by .26% on Wednesday. Merck stocks saw a 0.27 percent decrease on Wednesday, based on latest Yahoo! Finance data.

In terms of key growth areas, health care stocks seem to be making waves in the same arena as its younger biotech sibling.

JNJ’s hepatitis C, immunology, and oncology pipeline have boosted JNJ’s earnings, Forbes.com reported. Sales for its immunology drugs Simponi and Stelara rose by 9.3 percent and 31.8 percent to $715 million this year. The company’s new Hep C drug, Olysio, also eclipsed expectations, with sales reaching $354 million.

Meanwhile JNJ’s cancer drugs Velcade and Zytiga sales edged up by 15.8 percent ($408 million) and 48.8 percent ($512 million) respectively.

MRK’s Q1 earnings were up by seven percent despite disappointing sales, Yahoo! said. On Tuesday, the company announced quarterly adjusted diluted earnings per share (EPS) of $0.88 and a total earning of $10.26 billion.

The company’s sales suffered a bit with a five percent decrease from $8.89 billion to $8.45 billion. But while sales of MRK’s asthma medication Singulair and antihistamine Nasonex dipped by 20 percent and 19 percent respectively, its anti-inflammatory drug Remicade  and diabetes drug Januvia/Janumet increased by 10 percent and three percent.  Revenues from Januvia/Janumet alone for Q1 amount to $1.33 billion.

Reluctance in Buying into Biotech

7 biotech companies stocks on the S&P 500 share 23 percent of the total market capitalization for the healthcare sector, Russollillo said in his article. Despite this, biotech stocks have remained on the sidelines of big healthcare M&As.

TheStreet biotech columnist Adam Feuersteinsaid it puzzles him why Pfizer, which recently announced its plans of buying AstraZeneca (AZN), is not bidding on biotech companies like Gilead (GILD), Biogen Idec (BIIB) and Celgene (CELG). Feuerstein noted that the Pfizer-AstraZeneca deal probably costs over $100 billion.

He also cited Novartis (NVS), which is purchasing GlaxoSmithKline’s (GSK) cancer therapeutics for $16 billion and selling its vaccine portfolio to Glaxo for $7 billion; and Valeant Pharmaceuticals (VRX), which proposed a $50 billion takeover bid to Allergan (AGN), as other examples of Big Pharmas not buying into biotech.

At Allicense 2014, a healthcare conference attended by Feuerstein, Bristol-Myers Squibb (BMY) VP for Business Development Graham Brazier told Feuerstein that the “current market caps” and “necessary takeover premiums” make biotechs a no-buy for Big Pharmas.

Celgene business development VP George Golumbeski, on the other hand, added that Big Pharmas’ “aversion to risk” is another reason why the latter don’t want to acquire biotech stocks.

Biotech and healthcare share the same market scope. Gilead, which is currently the biggest and top-earning biotech stock, has a strong foothold in the Hep C arena with its drug Sovaldi (as mentioned earlier JNJ has also performed well in the Hep C market with its new drug Olysio). Buying into Gilead of course could help Big Pharmas expand their market further, both in the short and long term.

In related news, Abbott Laboratories (ABT), a big healthcare stock, bought a micro-cap called EAS Sports Nutrition for its Abbott Nutrition division sometime last year, according to Life Sciences Report. In fact, a number of promising small-caps and micro-caps are in the must-buy territory. So what gives?

BioCorRx Inc. BICX, for example, is a small micro-cap that has successfully tapped into the $23 billion addiction treatment industrywith its revolutionary Naltrexone time-release implant. The Naltrexone implant curbs alcohol and opioid cravings in patients and is seen by many in the industry as a game-changer in alcohol and opioid rehabilitation. BioCorRx stocks closed at 0.16 on Wednesday, up by 4.78 percent from its previous close.

Diagnostic product developer Volition Rx Ltd. VNRX, which has clinical trials for its neuclosomes-based diagnostic technology, and Omni Bio Pharmaceutical, Inc. OMBP, which offers a plasma-derived alpha-1-antitrypsin (AAT) drug that is effective in treating emphysema, also appear to be promising micro-cap biotechs, as Life Sciences Report had noted.

Biotech’s role in medical treatment cannot be ignored as Russolillo noted in his article. As the aging population and Affordable Care Act continue to increase healthcare services demand, biotech companies will even play a larger role in the grand scheme of things. The question is, will healthcare stocks take notice?