Issues Likely to Impact Healthcare Stocks in 2017

Around this time each year, the pundits offer their “lists” of predictions or trends to watch for in the upcoming year. We all like to look at lists, mostly because they are short, sometimes fun, and on rare occasion may even turn out to be correct! More often, predictions from the pundits fail to pan out, but nevertheless, it does help us, as investors, to hone in on the things that might have positive or negative impact on the sector. In that light, In Sickness and Wealth will offer its list of the top items that will move companies in the healthcare space.

  1. Trumponomics—Economists are divided on Trump (oh there’s a shocker – economists not agreeing!!). Some say his policies will help; other say Trumped up Trickle down economics will backfire. Honestly, they don’t know. What we do know: we saw Obama on TV, basically saying he would bankrupt the coal industry… which he had a hand in doing. We can’t recall a sitting U.S. President actually wanting an industry to die. Trump seems to be more pro-business than prior executives in the White House. He’s not in office yet, but he’s already trying to save jobs and promote businesses doing business in the United States.
  1. Interest Rates—If they go significantly higher, it will be great for savers and retirees. It will be a drag on stock prices including healthcare stocks. It will be catastrophic for bond investors and the losses in the bond market are starting to be felt. Anyone with long-duration bonds has seen a few years of interest coupon payments flushed down the toilet.
  1. Healthcare sector correction—After an amazing multi-decade bull market in the healthcare sector, we are LONG overdue for a breather or even a significant correction of 15-20 percent as measured by the Healthcare Sector ETF (ticker XLV). We will use any correction to add to positions and establish new ones. Many high-quality stocks have seen 35-50 percent retracements of their gains. See our last issue.
  1. Drug Pricing—Despite Hillary losing, we think the Republicans will still saber rattle here. Some of these drugs are obscenely priced and unaffordable to a great deal of individuals in the U.S.  Pharmacy Benefit Managers and Payers may continue to pressure drug manufacturers and distributors.
  1. ACA makeover or repeal—the great wildcard in 2017. Will it get a makeover and remain mostly intact, or will it be trashed? If they discard it all, it could wreak havoc on the sector. But the bargains created by the rout in healthcare stocks might prove to be a once-in-a-decade opportunity to buy quality healthcare stocks at unbelievable prices.
  1. Sector Rotation—Money flow is key to analyzing stock prices for intermediate and short term. Right now the street loves the financials and anything remotely connected to infrastructure as both look to benefit from a Trump presidency.  Institutional money (mutual funds, pension funds etc…) flows from sector to sector.  It appears that its flowing out of healthcare and into financials and materials.  This is part of the normal breathing of the markets.  It’s rare that all sectors are hot at once.  And as we mentioned above, healthcare has been hot since the mid 1980s.
  1. Patient Outcomes—Reimbursement for medical expenses and drugs will have a little kicker – the procedure or drug will actually have to be successful in treating the patient. If a hospital pays $20,000 for a patient to have an interventional cardiology procedure and the patient ends up back in the hospital three weeks later, the hospital’s reimbursement will suffer. Ditto for prescribing drugs.
  1. Technology and Medicine—Fit bits and wearable devices that help us gather data on our health and fitness are just the beginning. Telemedicine and remote medicine will gain traction in the coming year. They should also help contain costs and improve outcomes.
  1. The Immuno-Oncology Race—As we have reported here several times, Bristol Myers had the early lead in the race. Merck’s Keytruda is now the leader in several cancer indications. But Merck better not look back or rest on its laurels – other companies will be introducing new drugs in the coming year for all checkpoint inhibitors.
  1. JP Morgan Healthcare Conference—Each year in January, the entire healthcare sector focuses on the Super Bowl of healthcare conferences. It’s a time when biotech and all of healthcare report important findings in clinical trials and other product intelligence. Watch closely. We will try and post relevant actionable commentary on the conference.
  1. Express Scripts and Anthem fightIn Sickness and Wealth weighed in on this last summer and we thought the two would play nice and come to terms with each other. This now looks less likely. The longer this goes, the more strained the relationship becomes. Sarah James, a Wedbush analyst believes that the relationship will not survive. We own the stock and are watching it carefully. If ESRX loses Anthem, their largest customer, we hope that it’s discounted in the stock price already. If not, further declines will result and send some shocks throughout the system. Of course, whoever gets the Anthem business, will be a big winner.
  1. The Gene Editing Patent dispute—This may not be decided for years but if a decision is made by the U.S. patent office in 2017, the decision will likely be appealed by the losing party. Harvard/MIT vs. University of California Berkeley, possible Nobel Prizes in the wings… it doesn’t get any better than this genetic geek-version of the UFC fighting championships.

 

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