Biotech Growth Paces Sector

7/11/2016


Biotechnology stocks are the weakest performers in the weakest S&P 1500 sector this year. The average biotechnology stock has lost 16% in 2016, as shown below. Health-care stocks have averaged returns of just 1% including dividends this year, last among the index's 10 sectors.

DRUG STOCKS LOOK CHEAP AFTER THE SELL-OFF
The S&P 1500 drug and biotech stocks have lagged the health-care sector and broad index in 2016. Drug and biotech stock valuations now look particularly attractive relative to both five-year norms and other health stocks.
12-Month Change
Trailing P/E Ratio
YTD
Total
Return
(%)
Company (Price/Ticker)
EPS
(%)
Sales
(%)
Est.
EPS
(%)
Current
5-Year
Average
Forward
P/E Ratio
Quadrix
Overall
Score
Biogen ($247; BIIB)
20
8
5
14
27
13
(19)
91
Gilead ($86; GILD)
33
19
(5)
7
15
7
(15)
98
Shire ($188; SHPG)
(6)
8
4
16
21
15
(8)
63
Industry/sector (number of stocks)
Biotechnology (18)
(2)
16
11
22
30
23
(16)
61
Pharmaceuticals (24)
6
9
12
19
25
17
(5)
54
Health care (161)
8
13
11
24
24
22
1
60
All S&P 1500 stocks
2
2
7
21
21
20
7
59
Note: Quadrix scores are percentile ranks, with 100 the best. 

Biotech's poor returns stem in part from fears that intensifying political pressure will eventually force drugmakers to cut prices. Some health insurers and pharmacy-benefit managers have secured deals with drugmakers that guarantee extra discounts if new medications fail to help patients as much as advertised.

We certainly can't blame the industry's underperformance on weak underlying growth. U.S. prescription sales advanced about 8% in the first four months of 2016, says industry researcher IMS Health. Prescription-drug spending rose 5% last year for commercially insured patients, according to Express Scripts ($76; ESRX). That growth was entirely driven by an 18% jump in specialty drugs (think multiple sclerosis, cancer, hepatitis C, and HIV), while sales of traditional drugs (diabetes, blood pressure, and cholesterol) held flat.

Total drug volumes have remained fairly steady, with growth ranging from 0% to 2% annually over the past four years. The bulk of the growth in drug spending comes from higher prices, especially for specialty drugs. Drug prices rose 3% in 2015, as 11% growth in specialty-drug prices countered a 2% decline for traditional drugs.

Last month, Gilead Sciences ($86; GILD) priced Epclusa, its newest hepatitis C treatment, at $74,760 for a 12-week course, below earlier treatments Sovaldi (list price of $84,000) and Harvoni ($94,500). A lower list price for Epclusa could be Gilead's response to political criticism and new competition from other drugmakers. It may also signal a new pricing strategy that incorporates fewer discounts. Still, Gilead has quietly raised prices on its other drugs.

Even if prices plateau, rising demand should help support growth for specialty drugs. Volume growth for specialty drugs accelerated for the third straight year, nearing 7% in 2015.

Total drug spending is projected to rise 7% to 8% annually through 2018, according to Express Scripts, driven by a 17% jump in specialty drugs. Gilead is a Buy and a Long-Term Buy. Express Scripts is an A (above average).


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