The financial community has had a laser focus on the healthcare sector this year, from stock prices to valuations to M&A activity. Some of the data has been positive, some pretty dismal. Stock prices were all over the place in 2015, particularly in biotech. The Nasdaq Biotechnology ETF (IBB) opened the year at $306.34, peaked at $398 in July and then plunged to $289.48 by the end of September. Despite the volatility, healthcare was a top performing sector through three quarters and is expected to lead again in Q4 (see “Healthy growth”).
One of the most talked about names throughout the year was Gilead Sciences (GILD), the darling of the biotech space. Gilead’s success has been largely tied to its Hepatitis C drug franchise, the disease impacting nearly 2% of the world’s population. The company’s two drugs, Solvaldi and Harvoni, were introduced in 2014. Solvaldi was approved in December 2013 and went on sale in Q1 of 2014, helping drive triple-digit profit growth each quarter that year. Harvoni, a new combination Hepatitis C therapy, was approved in October 2014 and helped keep the growth going in 2015.
The company has come under fire for the high price of its drugs at nearly $1,000 a pill. Gilead was forced to make several price concessions when trying to convince insurers to carry Solvaldi and Harvoni as their primary HCV drugs, specifically to compete against a similar offering from AbbVie (ABBV). Criticism over inflated drug prices hit a fever pitch in 2015, especially in reaction to Turing Pharmaceuticals’ decision to increase the cost of a drug to treat AIDS and cancer patients by 5,000%. The subsequent backlash, including a scalding tweet from presidential candidate Hillary Clinton, caused a sell-off in biotech and villainized Turing CEO Martin Shkreli. Price aside, the curative nature of Gilead’s drugs means it will soon have to focus on a new franchise, heating up rumors that the company will be making an acquisition in the near future.
Other highlighted names throughout the year include those in the Alzheimer’s space, particularly Biogen Idec (BIIB) and Eli Lilly (LLY). Alzheimer’s disease afflicts more than 5 million Americans, a number that without medical intervention is expected to triple in the next 35 years. Analysts predict a successful treatment for the disease could see sales of $20 billion annually. Both Biogen and Eli Lilly released the results of their biggest trials to date this summer and both fell short of expectations. Biogen has reported double-digit EPS growth for the past 11 quarters and double-digit revenue growth for the past 10 quarters excluding Q2 2015. While Biogen called the results of its experimental drug, Aducanumab, encouraging, it did not effectively slow Alzheimer’s cognitive declines as had been hoped.
Eli Lilly’s drug, Solanezumab, had missed its overall goals in those studies, but showed signs of efficacy for patients with mild or early stages of Alzheimer’s.
The rich valuations for many of these biotech companies also have been in the spotlight. Even Federal Reserve Chair Janet Yellen expressed her concern to Congress in July, saying the valuations of small-cap biotech stocks in particular are “substantially stretched.” As in all growth industries, high P/Es are expected, with the Nasdaq Biotechnology ETF boasting a forward P/E of 28. If fundamentals continue to come in as strong as they have, the high multiples are justified, but being priced to perfection leaves very little wiggle room come earnings season. Companies that miss expectations will see their stock price get punished.
But it’s not all about biotech. There’s been a ton of M&A activity in healthcare, mainly among the insurers and pharmaceuticals. The upholding of the Affordable Care Act by the Supreme Court in June caused insurers to scramble to consolidate. Aetna (AET) struck first, acquiring Humana (HUM) later that month, followed by the consolidation of Cigna (CI) and Anthem (ANTM). The big five insurers now have been boiled down to three, with only UnitedHealth Group (UNH) remaining as a standalone. Several drug companies such as Allergan (ACT) and Pfizer (PFE) also have merged in order to gain access to new drug therapies.
Healthcare is an exciting space right now, with tons of capital flowing in and revolutionary treatments being developed. However, the industry also is under intense scrutiny by investors and regulators alike, around pricing, valuations and consolidation. With promise of growth and threats of greater price oversight, healthcare could be one of the most volatile sectors in 2016.