Healthcare Industry Rocked the S&P 500 List in 2018, What About 2019?

Bank of America Merrill Lynch’s research investment committee said; “Healthcare is cheap, under-loved by fund managers, ranks #2 behind Technology in our quantitative model, and has delivered very strong results during second quarter earnings,”  last summer. But the healthcare industry does not promise good profits in 2019.

Healthcare industry rocked the S&P 500 list, dominating the market during 2018, however, due to regulatory concerns regarding Affordable Care Act, some of the biggest players of the industry are showing double-digit losses, indicating that 2019 might be a troublesome year even for healthcare as it progresses with Q2.

Although healthcare industry has been a safe investment option for many investors looking for stability in growth rate, particularly in times of great volatility in the markets, reports from 2018 according to analysts following up with the industry are showcasing red flags that might indicate that healthcare industry is ready to take a downward turn in 2019.

The ruling that made Affordable Care Act unconstitutional seems to have taken the healthcare industry to a less stable path in the market as one of the biggest and largest exchange-traded fund, the Health Care Select Sector SPDR Fund (XLV) have recorded double-digit losses with the beginning of December 2018, while other companies, such as Tenet Healthcare Corp, are also marking losses in the market.

The regulatory uncertainty seems to be sending the healthcare stocks to a downward path in addition t having a growing deficit in the government budget, which also contributes to the negative outcome in the market as the deficit is affecting the healthcare sector as well.

In the past, outperformance in the healthcare sector on S&P 500 has usually led to underperformance based on the previous historical trends, which is why analysts consider that the healthcare industry is in for another downward spin in the upcoming period, at least in oppose to other sectors on S&P 500 index.

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However, market watchers are implying that this might be the right time for investors to take part in the industry’s stocks by investing in healthcare while in a dip.

What is the Healthcare Sector?

The healthcare sector consists of companies that provide medical services, manufacture medical equipment or drugs, provide medical insurance, or otherwise facilitate the provision of healthcare to patients.

The healthcare sector is one of the largest and most complex in the U.S. economy, accounting for close to a fifth of overall gross domestic product (GDP), according to the OECD. Some of the highest-quality care in the world can be found in the U.S., but in terms of the population’s overall health the U.S. lags other wealthy, developed countries. Life expectancy is 78.8 years, according to the OECD, below the club’s average of 80.6 (the OECD’s 35 members are mostly rich, industrialized countries in Europe and North America).

Despite these subpar results, the U.S. spends far more than any other country on healthcare, measured per head of population: $9,892 (compared to per-person GDP of $52,321.6), two-and-a-half times the OECD average. (See also, Why Healthcare Is Broken in the U.S.)

This situation has led to a number of national reform efforts: a failed attempt by Democrats during the Clinton administration, a sweeping overhaul passed by the same party during the Obama administration (the Affordable Care Act), and a number of (so far) unsuccessful Republican efforts during the early months of the Trump administration. Investors in the health care sector face considerable political risk as a result of this push-and-pull: in the medium term, the U.S. could plausibly transition to a single-payer health system in which the federal government becomes the sole insurance provider, or a decentralized system in which states have far more leeway to structure and regulate their own health systems.

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At the same time, the healthcare sector enjoys near-inelastic demand: because their health and potentially lives are at stake, patients are willing to pay almost any price for treatment, allowing many companies in the sector to earn high margins.

Industries Within the Healthcare Sector

The healthcare sector contains a diverse array of industries, with activities ranging from research to manufacturing to facilities management.

Drugs

Drug manufacturers can further be broken down into biotechnology firms, major pharmaceuticals firms, and makers of generic drugs. The biotech industry consists of companies that engage in research and development to create new drugs, devices and treatment methods. Many of these companies are small and lack dependable sources of revenue. Their market value may depend entirely on the expectation that a drug or treatment will gain regulatory approval, and FDA decisions or rulings in patent cases can lead to sharp, double-digit swings in share prices. Examples of (larger) biotech firms include Gilead Sciences Inc. (GILD) and Celgene Corp. (GELG).

Major pharmaceuticals firms also engage in research and development, but tend to focus more on manufacturing and marketing an existing portfolio of drugs than the typical biotech firm. These companies tend to have more dependable streams of revenue and a more diversified “pipeline” of drugs in the research and development stages, making them less dependent on make-or-break drug trials and their shares less volatile. Examples of major pharmaceutical firms include Novartis AG (NVS) and GlaxoSmithKline plc (GSK).

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Some pharmaceutical firms specialize in generic drugs, which are identical to name-brand drugs but no longer enjoy patent protection. As a result, there is often competition to manufacture identical drugs, leading to lower prices and thinner profit margins. An example of a generic drugs firm is Teva Pharmaceutical Industries Ltd. (TEVA).

Medical Equipment

Medical equipment makers range from firms that manufacture standard, familiar products – scalpels, forceps, bandages, gloves – to those that conduct cutting-edge research and produce expensive, high-tech equipment such as MRI machines and surgical robots. Medtronic plc (MDT) is an example of a medical equipment maker.

Managed Healthcare

Managed healthcare companies provide health insurance policies. The “Big Five” firms that dominate the industry are UnitedHealth Group Inc. (UNH), Anthem Inc. (ANTM), Aetna Inc. (AET), Humana Inc. (HUM) and Cigna Corp. (CI).

Healthcare Facilities

Health care facilities firms operate hospitals, clinics, labs, psychiatric facilities and nursing homes. Examples include Laboratory Corp. of America Holdings (LH), which operates facilities that perform blood tests and other analysis; and HCA Healthcare Inc. (HCA), which operates hospitals and other healthcare facilities in the U.S. and UK.

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