News

Healthcare profit outlook brightens on Obamacare, drug prices

Healthcare profit outlook brightens on Obamacare, drug prices

HEALTHCARE:The jump in forecasts has come in the past two months, thanks largely to rising estimates for biotechnology companies such as Gilead and for insurers, including Aetna. Photo: Associated Press

By Caroline Valetkevitch

NEW YORK (Reuters) – U.S. healthcare companies are winning higher profit forecasts, bucking a wider trend on Wall Street, as pricey new biotech drugs hit the market and insurance enrollment rises under the Affordable Care Act.

Analysts’ profit expectations for the group have risen sharply since the start of the year, while estimates for most of the other nine Standard & Poor’s 500 macro sectors have fallen, according to Thomson Reuters data.

The jump in forecasts has come in the past two months, thanks largely to rising estimates for biotechnology companies such as Gilead and for insurers, including Aetna.

It provides some early evidence that President Barack Obama’s signature healthcare overhaul could be a long-term source of profit growth for managed care providers.

“Now you’re actually seeing real numbers grow and that population start to take off,” said Betsy Pecor, portfolio manager at Eagle Asset Management, based in St. Petersburg, Florida. Companies “are actually seeing that growth.”

About 8 million people have signed up for the plans, which are provided by commercial subscribers and come with income-based government subsidies, above the 2 million who had enrolled by January.

Aetna and other insurers have said they lost money on the plans this year, but insurers are heading into new markets for 2015 to add customers.

Many healthcare companies are better able to manage Obamacare now than they were last year, Pecor said.

EXCEEDS FORECASTS

Profit estimates for healthcare companies for 2014 have jumped from up 8.3 percent at the start of January to up 12.2 percent now, one of just a few sectors with a 2014 earnings outlook that exceeds profit-growth forecasts at the start of the year, Thomson Reuters data showed.

Earnings growth estimates for the whole S&P 500 this year have gone down slightly in that period, from 10.8 percent in January to 9.1 percent now.

The upward revision is also the most of any sector except utilities, where estimates reflect a blow-out first quarter courtesy of home heating needs during the cold winter in North America. By contrast, the revisions to the health sector earnings reflect rising expectations for the second quarter and beyond.

The question for investors is whether the improving outlook is already reflected in stock prices.

The healthcare sector <.SPXHC> jumped 39 percent in 2013, more than any other sector except consumer discretionaries <.SPLRCD>. Healthcare is up 10.2 percent so far for 2014, outpacing the 6 percent rise for the wider S&P 500, but its advance has shown signs of slowing in the last month or so.

“You have more people using healthcare at these higher rates, and that’s going to get you earnings, but my question is for how long,” said Kim Forrest, senior equity research analyst, Fort Pitt Capital Group in Pittsburgh. “It’s really unclear at this point how much money this is and how long it can be sustained.”

To be sure, valuations for the healthcare sector are relatively high. The price-to-earnings multiple for the sector is at 16.9, down from 17.3 at the start of the year. That compares with the S&P 500’s earnings multiple of 16.0, which is up from about 15.1 at the start of 2014, Thomson Reuters data showed.

There may still be pockets of value, especially in the health industry groups that have seen the greatest growth in earnings forecasts: biotech and insurance. Biotech’s P/E ratio is 16.8 compared with 24.5 at the start of the year, while the average P/E ratio for the five managed care companies in the S&P 500 is 13.6, up from 12.4 at the beginning of 2014.

Phil Orlando, chief equity market strategist at Federated Investors in New York, said his firm rotated money out of the high-growth biotech names and into less volatile names in the healthcare sector in March, but he still likes biotech.

“There will come a point in the cycle, maybe later this year, that we put some money back into these biotechnology names.”

PRICING POWER

Biotechnology companies, which were top victims in the sell-off of so-called momentum stocks earlier this year, are the biggest contributors to the gain.

Biotechs are benefiting from pricing power, as more of their blockbuster drugs come on the market, analysts said. The U.S. Food and Drug Administration approved 39 drugs last year, the most of any year except 1996.

“They’re all in the midst of launching or have launched new products that are head and shoulders above the existing products out there, and they’re getting the pricing and the demand,” said David Heupel, senior healthcare analyst at Thrivent Investment Management, in Minneapolis.

In the past 90 days, 25 analysts raised their profit expectations for the full year on Gilead, the maker of the market-leading hepatitis C treatment, Sovaldi, with a mean change of 65 percent higher. None revised expectations lower, Thomson Reuters StarMine data showed.

Sovaldi’s $84,000 price tag for a 12-week treatment is so high, however, that it has come under fire from insurers, who are pushing Gilead’s rivals to offer lower prices when their hepatitis C medicines go on the market.

For Alexion Pharmaceuticals , 18 analysts raised their profit estimates in the past 90 days, with a mean change of 9.8 percent higher, while none revised them lower.

Among insurers, 12 analysts raised their profit expectations over the past 90 days for Aetna’s earnings, with a mean change of 2.2 percent higher, and just one revised them lower. For Cigna , 15 analysts increased their profit estimates in the period, with a mean of 1.8 percent higher, compared with one revising them down, according to the StarMine data.

The number of analysts who raised their earnings expectations for the healthcare sector as a whole in the past 90 days is 416 compared with 391 who lowered them over the same period, with a mean change of 3.1 percent higher.

(Reporting by Caroline Valetkevitch, editing by John Pickering)

Recent Headlines

3 hours ago in National, Olympics, Sports

Flame lands in troubled Brazil for 94-day relay to Games

21-overlay-1

President Dilma Rousseff lit the Olympic torch in Brazil's capital on Tuesday and pledged that political turmoil engulfing her nation would not harm the first Games to be held in South America.

4 hours ago in National, World

Islamic State kills U.S. Navy SEAL in northern Iraq

10-overlay-1

Islamic State militants killed a U.S. serviceman in northern Iraq on Tuesday after blasting through Kurdish defences and overrunning a town in the biggest offensive in the area for months.

11 hours ago in Sports

Cavaliers beat Hawks in series opener

14-overlay-1

A week off did not disrupt the Cleveland Cavaliers' momentum, nor was it enough time to alter the Atlanta Hawks' history against them. The Cavaliers still have never lost to the Hawks in the postseason, but this one was not easy.

11 hours ago in Sports

Murray makes his mark as Pens beat Caps

capsREUTERS

The Pittsburgh Penguins do not have a goal yet in the series from Sidney Crosby. Or a power-play goal. What they do have is a 2-1 lead over the Washington Capitals.

11 hours ago in Sports

British soccer team Leicester celebrates 5,000-1 title success

leichesterREUTERS

Leicester City's Premier League title dream became reality on Monday when one of the greatest sporting fairytales reached its conclusion in west London where chasing Tottenham Hotspur were held 2-2 by Chelsea.