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 Selling has spread from biotechs - shaken on Sept. 21 when Hillary
Clinton first tweeted concerns about drug prices - to other areas of
the healthcare sector. Investors have been dumping shares of
everything from hospitals to traditional pharmaceutical companies
and insurers in recent weeks.
Since peaking in July, the Nasdaq Biotech Index has fallen 23
percent, the broad S&P Health Care Index has lost 12 percent
and the S&P 500 Health Care Facilities index is down 31 percent.
Fund managers now say they expect myriad pressures weighing on the
sector for the rest of the year and possibly into 2016. They include
regulatory threats on drug prices, disappointing earnings, higher
interest rates that could hurt heavily-indebted hospitals, and the
loss of the initial Obamacare bump in business.
Profit warnings from two companies since last week - HCA Holdings
and Community Health Systems - have pummeled shares of hospital
operators. The health facilities index is down 13 percent since its
Oct. 14 close.
"The best case through the end of year is range-bound for
healthcare, maybe biased downward slightly," said Les Funtleyder,
healthcare portfolio manager at E Squared Asset Management in New
York.
The cautious attitude of investors is new for the S&P 500 healthcare
sector, which has provided double-digit returns every year since
2011.
That run-up, prompted in part by the addition of roughly 17 million
people by the Affordable Care Act, as well as expectations of
financially rewarding mergers, may have left the sector priced for
only the best of news.
By July 20, the broad health care index was selling at a forward
price-to-earnings ratio of 18.7, higher than most other sectors and
a full percentage point higher than the broad S&P 500 index. That
P/E ratio is down to about 16, in line with the broader market.
"I think the more general sector rotation has probably created a
high bar for these companies, and I am a little worried that meeting
expectations isn't even enough," said Jeff Jonas, portfolio manager
at GAMCO Investors.
REASON FOR CAUTION
Third-quarter results could give investors further reason to be
cautious. Only half of the health care companies that have reported
their earnings thus far have beaten analysts estimates on revenues.
Next week brings results from hospital operator LifePoint Health as
well as from insurers Anthem and Aetna. Shares of UnitedHealth Group
Inc fell last week even though its third-quarter profit was slightly
better-than-expected.
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One issue for hospitals and insurers is that most of those
healthcare consumers who were added because of the Affordable Care
Act were already enrolled last year - so this year's revenues and
earnings will be measured off of a fully-implemented baseline for
the reform law.
In its forecast late Wednesday, Community Health Systems cited lower
hospital admissions and estimated third-quarter revenue below
analysts' expectations, while HCA blamed higher labor costs and more
uninsured patients in its outlook last week.
To be sure, the health sector still is seen as profitable, with
third-quarter earnings projected to be up 4.5 percent from the same
quarter a year ago.
But the move out of the sector has been rapid. The iShares U.S.
Pharmaceuticals exchange traded fund posted $77.8 million in
outflows in the third quarter, its largest quarterly outflow since
it started in 2006, and it has already lost $75 million in the first
22 days of the current quarter.
The iShares U.S. Health Care Providers ETF, which includes insurers
and hospital operators, recorded its first withdrawals this year in
that quarter, and investors are continuing to pull money out this
quarter.
All of that is an especially sharp reversal of fortune from the
summer, when health care shares rallied after the U.S. Supreme Court
upheld the Obama health care law.
(Reporting by Caroline Valetkevitch and Caroline Humer; Additional
reporting by Susan Kelly in Chicago; editing by Linda Stern and Nick
Zieminski)
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