February 25, 2019
By Lewis Krauskopf
NEW YORK (Reuters) – U.S. healthcare stocks could face more turbulence on Tuesday, after a bumpy early 2019, as top executives from some of the largest pharmaceutical companies are expected to get grilled in the U.S. Senate on the high cost of prescription drugs.
The Senate Finance Committee hearing on drug pricing is likely to turn up the volume on the debate over healthcare costs, an issue looming as a potential negative for the sector’s performance in the coming months.
As the 2020 U.S. presidential race heats up, drug companies could become political targets, causing unease for investors who hold the stocks, as was the case ahead of the last presidential election in 2016.
“I think the rhetoric is still going to be pretty harsh,” said Jeff Jonas, a healthcare portfolio manager with Gabelli Funds. “I don’t think any actual policy is going to be implemented, but I think the rhetoric is going to be an overhang.”
Chief executives and other top officials are expected at Tuesday’s hearing from AbbVie Inc, AstraZeneca Plc, Bristol-Myers Squibb Co, Johnson & Johnson, Merck & Co Inc, Pfizer Inc and Sanofi SA.
“We expect the hearing to be negative for the group, and continue to believe investors are under-pricing the risks,” Wells Fargo analyst David Maris said in a research note.
Kevin Gade, a portfolio manager at Bahl & Gaynor focusing on pharmaceutical and biotech stocks, said he expects the executives to point the finger for high drug prices elsewhere in the drug-supply chain, such as at pharmacy benefit managers or insurance companies.
“I don’t think pharma is going to be able to win them over,” Gade said, adding that “you can only hope…that anything disastrous is avoided.”
So far this year, the S&P 500 healthcare sector has climbed 7 percent against a nearly 12 percent gain for the overall S&P 500, which is the benchmark index for large U.S. companies. S&P 500 pharmaceutical companies are up only 4 percent with S&P 500 biotech companies overall up 4.8 percent.
Investors said healthcare has underwhelmed this year largely because it was the best-performing major S&P 500 sector last year, as investors sought healthcare as a relative safe-haven when the market became more volatile at the end of 2018.
(GRAPHIC: U.S. health stocks lag in 2019 – https://tmsnrt.rs/2BU892P)
But they added that the political concerns also could be weighing on the group.
Although Republicans control the Senate committee running Tuesday’s hearing, drug pricing and the cost to U.S. consumers is expected to get a fresh spotlight with Democrats having taken control of the House of Representatives in January.
Nicholas Colas, co-founder of DataTrek Research, last week recommended that investors underweight healthcare stocks in part because the companies “are in the sights of both Democrat and Republican lawmakers, an important point as the 2020 presidential campaign cycle gets under way.”
“They are an easy target because the electorate really dislikes the American healthcare system,” Colas said in a note.
(Reporting by Lewis Krauskopf; editing by Alden Bentley and Bill Berkrot)