Political and market change
Derek Taner, CFA, Portfolio Manager, Invesco Global Health Care Team
Given the political controversy surrounding the Affordable Care Act (ACA), health care might seem like a topic of conversation to avoid. As an investment theme, however, there are plenty of positive things to say about the sector going into 2014 despite three years of relative outperformance. In particular, we are intrigued with the outlooks for the biotechnology, pharmaceutical and hospital sub-sectors.
Biotech: Compelling growth potential
Biotechnology continues to look compelling with robust earnings growth driven by existing products on the market and burgeoning late-state pipelines. In fact, there are only seven companies in the United States that are larger than $10 billion in market cap and that are growing long-term earnings north of 20% — and four of those are biotechnology companies.1 So in today's market, high growth rates are scarce, but still abundant in biotech. Importantly, we believe this growth is sustainable as it's driven by existing products on the market and conservative estimates for the pipeline. Moreover, the U.S. Food and Drug Administration has become more accommodative, and mergers and acquisitions within the space remain healthy, potentially providing even more interest and support for the sector.
Pharmaceutical companies: Negative effects of patent expirations appear to be winding down
We believe the outlook for major pharmaceuticals companies has improved dramatically over the past couple years. Major patent expirations are largely behind the industry while existing revenue streams look more durable and pipelines look more attractive. Moreover, management teams are more shareholder-focused by spinning out or selling non-core assets and giving more cash back to shareholders in the form of buybacks and dividends. Valuations are also attractive relative to other defensive growth sectors, and the stocks remain largely under-owned by institutional investors.
Hospitals: Increased traffic may be a benefit
Despite the headlines regarding implementation, we believe that hospitals are well-positioned to benefit from ACA — or "Obamacare." As many of the uninsured gain coverage, bad debt expense for hospitals should decline, and we expect earnings to accelerate dramatically. Moreover, expanded coverage should lead to higher health care utilization as newly insured patients tap into the health care system. Valuations also remain attractive given the growth rates, and the sector, similar to pharmaceuticals, is also under-owned by institutional investors.
Conclusion: Bright outlook for health care
Health care has performed remarkably well over the past couple years despite noise and political rhetoric related to the Affordable Care Act. We think this trend continues for several reasons that are only briefly highlighted in this blog. Valuations for the sector remain attractive with a host of fundamental drivers that we think will continue to spur above-average growth for the sector. Moreover, industry consolidation continues, and companies within this sector are more focused than ever on returning cash to shareholders and unlocking value.
1 Source: Piper Jaffray, Biopharmaceuticals Industry Note, Jan. 7, 2014
Invesco is not affiliated with Ameriprise Financial.
The views expressed here reflect the views of Invesco as of January 29, 2014. These views may change as market or other conditions change. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
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