Health Care Sector Outlook: Checking In Ahead Of Q2 Earnings Reports

Throughout most of 2018, the health care sector’s performance has been moving in line with the S&P 500 (SPX). That could deviate as Q2 earnings season gets underway in the next few weeks. 

For Q2, the S&P 500 health care sector is expected to report 9.8 percent year-over-year earnings growth and 5.9 percent revenue growth, according to FactSet. The S&P 500’s overall earnings growth and revenue growth is expected to increase 20 percent and 8.8 percent, respectively.  

While the topics still come up from time to time, concerns over drug pricing and Washington’s focus on different aspects of the healthcare system seems to have abated somewhat in 2018 and haven’t weighed on the sector as much as they did in 2017. 

Some uncertainty was removed when President Trump announced in May his administration’s plans to reduce drug prices. The plans reiterated a lot of previous points the Trump administration had made regarding high list prices, the rebate system, and making it easier for generics to be developed, so there wasn’t as much of a market reaction as there had been in the past when the news initially broke. 

One area that some analysts have said they still see as a potential risk for health care stocks is if any major changes to Medicare or Medicaid are enacted. There have been bills put forth in Congress that seek to reduce the U.S. deficit by cutting from those two programs, which accounted for roughly 37 percent of the $3.3 trillion in national healthcare expenditures in 2016, according to the Center for Medicare and Medicaid Services.

These topics are likely to still come up from time to time, potentially adding to volatility in the sector. 

HEALTH CARE IN 2018. The S&P Health Care Select Sector Index (IXV) is charted above, which is up 3.33 percent year-to-date. Since mid-March, the sector has been trading in a narrower range and it’s bumping against resistance once again. Chart source: thinkorswim^® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Biotech Has Continued to Outperform

The degree of risk within the health care sector can vary greatly. On one end of the spectrum, there are biotech stocks that are still in the pre-clinical or clinical research phases. On the other end are established health care companies with large portfolios of approved drugs and a diverse pipeline of potential treatments. 

So far this year, biotech has been outperforming the broader health care sector. The S&P 500 Biotech Select Industry Index is up 18.31 percent in 2018, versus the S&P 500’s (SPX) 2.9 percent increase and the S&P 500 Health Care Select Sector Index’s 3.33 percent increase. Investors appear to be in a risk-on mood when it comes to the biotech industry, but with a beta usually around 1.4, it can tend to drop quickly when the broader market sells off.   

Amazon Making Moves into Healthcare

Speculation about what markets Amazon.com, Inc. AMZN  might enter is commonplace. Many analysts and market watchers apparently were thinking that the company would eventually take steps to expand its presence in the healthcare market and it took a major step with its acquisition of online pharmacy PillPack, which Amazon announced at the end of June. 

PillPack is licensed to ship prescriptions in 49 states and the company presorts and packages medications into packets that are stamped with the date and time to take them, as opposed to how traditional pharmacies usually provide a bottle filled with a monthly supply. After the announcement, Rite Aid Corporation RAD, CVS Health Corp CVS and Walgreens Boots Alliance Inc. WBA collectively shed $11 billion in market cap. 

The healthcare market is a massive one that many tech companies have eyed for potential growth opportunities, however, both federal and state regulations can potentially make it a challenge to expand into. Retail prescription drug spending in the U.S. hit $328.6 billion in 2016, according to the Centers for Medicare and Medicaid Services. That’s just one small part of the nation’s health care spending, which totaled $3.3 trillion in 2016. 

Mergers and Acquisitions to Continue? 

The health care sector saw a flurry of deals announced at the beginning of the year. CVS announced it would buy Aetna Inc. AET for about $69 billion; privately held Albertsons announced it would acquire the remainder of RAD that WBA didn’t acquire; and Cigna Corporation CI announced it would acquire pharmacy-benefit manager Express Scripts Holding Co ESRX for $52 billion. 

Those deals are still at various states of regulatory and shareholder approval. Some analysts have viewed the recent judge’s ruling that AT&T Inc. T acquisition of Time Warner merger could proceed as a sign that these deals are likely to pass regulatory approval, and could spur more deal making in the sector. 

Elsewhere in the sector, some of the major drugmakers have been busy buying companies to strengthen their pipelines. Novartis AG NVS acquired gene therapy company AveXis for $8.7 billion earlier in May, Roche Holdings AG Basel ADR RHHBY announced it would acquire the remainder of Foundation Medicine Inc. FMI that it didn’t already own in a $2.4 billion deal, and Eli Lilly and Co. LLY acquired ARMO Biosciences for $1.6 billion to add to its pipeline of cancer treatments. 

Major Earnings Dates

Below are some of the upcoming earnings release dates from companies that have confirmed when they’ll report:

• Johnson & Johnson JNJ and UnitedHealth Group (UNH) report before market open Tuesday, July 17
• Abbott Laboratories ABT reports before market open Wednesday, July 18
• Eli Lilly reports before market open Tuesday, July 24
• Gilead, Inc. GILD reports after market close Wednesday, July 25
• Merck & Co., Inc. MRK reports before market open Friday, July 27
• Pfizer Inc. PFE reports before market open Tuesday, July 31
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