2016 has been a mixed bag of performances across the healthcare sector, but it’s still forecasted to report the second highest revenue and earnings growth in Q3 out of the eleven sectors of the S&P 500. According to FactSet, the Health Care sector is expected to report 7% revenue growth and 4% earnings growth in the upcoming quarter. Five out of the six industries in the sector are expected to report earnings growth ranging from mid to high single-digits and Biotechnology is the only industry expected to report a year-over-year decline in earnings with a 4% decrease.
Despite increased political scrutiny over drug pricing, healthcare companies continue to maintain strong pricing power and have benefited from the U.S.’s aging population and larger insured population thanks to the Affordable Care Act. Strong drug pipelines combined with rapidly progressing clinical data in specialty-care areas should continue to spur growth in the future.
Expect a mix of performances when some of the bigger names like Johnson & Johnson (JNJ), Eli Lilly (LLY), Pfizer (PFE), Bristol-Myers Squibb (BMY) and Merck (MRK) report towards the end of October. JNJ is set to report on October 18 with consensus estimates of $1.65 earnings per share (EPS). JNJ stock has been a strong performer up 15.66% YTD. MRK has also had a solid year and the stock is up 19.66% YTD thanks to cost-cutting measures that helped boost Q2 EPS by 79% over last year. PFE’s performance has lagged JNJ and BMY so far this year, but the stock is still up 6.12% YTD and analysts are expecting $0.62 EPS when the company reports on October 25.
BMY faced a major setback in August when the company announced the failure of the company’s cancer drug trial. The failed trial will likely continue to weigh on the company’s future performance amid high pressure for major pharmaceutical companies to continue developing new blockbuster drugs. The stock plummeted following the announcement and still trades close to its 52-week lows. Investors will be paying close attention to its earnings release for updates about the company’s pipeline after the failed trials. Goldman Sachs recently upgraded LLY to buy from neutral on its promising late-stage pipeline, but the stock’s performance has trailed the industry so far this year even though revenue growth has accelerated in recent quarters.
Premiums Drop, But Deductibles Rise
Insurance premium growth has started slowing down, but deductibles have rapidly risen at the same time. According to the Kaiser Family Foundation’s Employer Health Benefits Survey, premiums rose an average of 3%, slightly less than last year’s 4% increase. At the same time, deductibles have risen a whopping 12%. One of the causes of this shift is employers reducing the use of Preferred Provider Organization (PPO) plans and transitioning to plans with lower premiums and higher deductibles. Many companies provide benefits to minimize the high-deductible costs, but the higher deductibles could cause some consumers to minimize doctor visits and healthcare spending.
Mergers and Acquisitions
With large stockpiles of cash and low cost of capital, companies across the health care sector continue to turn to mergers and acquisitions to boost sales and profits—a trend that has tapered off slightly but is expected to continue. Some of the biggest deals investors have their eyes on are the Anthem-Cigna and Aetna-Humana mergers, which face a considerable amount of government scrutiny over antitrust concerns and a lack of confidence the deals will go through.
Drugmaker Pfizer (PFE) recently decided against splitting up the company after mulling the decision for several years. The company had been considering separating its low-growth generics business from its patent-protected branded products, but the company decided the move wouldn’t increase cash flow or improve the separate business’ competitive positions. The decision comes several months after the company’s $160 billion inversion deal with Irish drugmaker Allergan PLC (AGN) fell through thanks to changes in U.S. laws that would’ve negated most of the tax savings for Pfizer.