Health Investors Struggle Under Weight of Washington’s What-Ifs
Health Investors Struggle Under Weight of Washington’s What-Ifs
(Bloomberg) -- Optimism is in short supply when it comes to health-care stocks as investors can’t see when the sector will recover from an array of regulatory threats.
Plagued by concerns about drug pricing and jitters over proposals for a U.S. government-run system, health care has gone from the top-performing group in the S&P 500 Index last year to its worst in 2019. Facing an election in less than 16 months, President Donald Trump may have run out of time in this term to enact meaningful changes affecting the industry, but observers say political questions are still likely to overshadow business fundamentals.
Given the “continued noise” from the Trump administration, “there are a significant number of investors who are completely on the sidelines from the industry,” SVB Leerink biopharma analyst Geoffrey Porges said in an interview. “And you can pick your ‘until’: until the proposed rule on Medicare international reference pricing is announced, or until the next Democratic debate, or until the election. There’s a lot of ‘until’s.”
Fund flows back Porges’s view. Investors this month yanked close to $900 million from the Health Care Select Sector SPDR Fund (XLV) through Monday. That puts the fund on track to see the largest monthly outflow since February 2018. Shares of XLV have fallen more than 1% this month, after climbing 6% in June. The fund has yet to top last year’s highs.
The primary concern is drug-price reform, says Jensen Investment Management portfolio manager Allen Bond. Of all the proposals that might move the needle, this one is the most immediately tangible given its bipartisan support. But even then, it’s hard to envision what it would involve after President Trump’s about-face on drug rebates, Bond said last week.
"We’re kind of in a wait and see on that one, but we believe the stocks we own are well-positioned," said Bond, who helps manage Jensen’s $7.8 billion Quality Growth Fund.
On Tuesday, Republican Senator Chuck Grassley and Democrat Ron Wyden introduced a drug-pricing package that also has the backing of the White House. The measure is expected to be taken up for debate this week.
Bond is sticking to large, diversified health-care companies because they can weather different regulatory environments. That includes “companies with competitive advantages that give them pricing power,” businesses “that have good, long-term growth drivers” and those that allow investment to create value.
Jensen’s not alone in that approach. Jefferies health-strategist Jared Holz notes that large-cap "growth-at-any-price" is the group most in favor in the industry right now, as it is in the broader market. Momentum bets are leading and "everything else feels less good or really bad," he wrote to clients Monday.
Stock Picking
Jon Stephenson, a senior portfolio manager at BNP Paribas Asset Management, said investors need to get more selective with their holdings, but acknowledged that “the degree of difficulty is incrementally harder” in the current environment.
“The most obvious opportunities are in the most innovative companies because irrespective of whatever pricing regime we have for drugs,” there will be demand for advanced medicines that drive better outcomes, he said.
His fund, BNP Parvest Health Care Innovators, has about $400 million under management and holds UnitedHealth as its top position, followed by European pharmaceutical companies Roche Holding AG, Novartis AG, AstraZeneca PLC and Bristol-Myers Squibb Co. as well as Vertex Pharmaceuticals Inc. among U.S. drugmakers.
The fund has trailed its benchmark, the MSCI World/Health Care Index, on a three-year annualized basis, but it’s ahead so far this year, according to its fact sheet.
High Risk
Mark Wade of CAZ Investments, a Texas-based multi-family office with about $100 million in health-care allocations, notes that despite discounted valuations in health care, it’s hard to make the pitch to clients.
Investors have to ask themselves whether they think a “single-payer system is going to happen? Or what’s the probability that it does?,” he said. “I, personally, would not make the bet. But if it does happen, it’s a black swan.
“The market today says health care has a higher-risk factor than other areas,” Wade said. Should today’s political rhetoric reverse, “they’ll catch back up.”
--With assistance from Carolina Wilson.
To contact the reporter on this story: Tatiana Darie in New York at tdarie1@bloomberg.net
To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Scott Schnipper, Jeremy R. Cooke
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