GOP Senate bill ignites massive rally in healthcare stocks; remember the dot-com era?

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US healthcare stocks posted sharp gains last week, with pharma, hospitals and insurers climbing after Senate Republicans released a draft bill to scrap Obamacare, while a recent explosion in biotech shares showed no signs of easing.

#Healthcare stocks posted gains after Senate #Republicans release plan to scrap #Obamacare Click To Tweet

The S&P 500 healthcare sector closed up 3.5% over the week, just under its all-time high of 936.94 on Thursday. (June 22, 2017) The sector easily topped other major groups on Thursday and gained about 4% last week.

“The initial proposal I think is more generous and more positive to the industry than expected,” said Jeff Jonas, portfolio manager with Gabelli Funds, according to Reuters.

Analysts said favorable elements in the bill, called the Better Care Reconciliation Act (pdf), included the elimination of taxes on industry and provisions to stabilize the insurance exchanges set up under former President Barack Obama’s 2010 healthcare law.

A delayed rollback of the expansion of Medicaid, the government insurance program for low-income Americans, also was seen as a positive move. A version of the bill was passed by the House of Representatives, where Republicans also have a majority, last month.

Included among the big crop of winners, Portola Pharmaceuticals Inc. (Nasdaq:PTLA) led advancing issues, rocketing $21.00, or 60% for the week, to $56.06. The FDA approved a new oral blood-thinner made by the South San Francisco-based company to prevent deep vein thrombosis and pulmonary embolisms in acutely ill patients who are not undergoing surgery. The drug, BevyxXa, known also as betrixaban, is the first oral treatment and first extended duration treatment for this patient population, the company said.

Elsewhere, Cara Ther­a­peu­tics Inc. (Nasdaq: CARA) soared $5.53, or 32%, to $22.65. The Stamford, CT-based company took off on the FDA’s award of its break­through ther­apy des­ig­na­tion for IV CR845, developed for a painful itch­ing con­di­tion called ure­mic pru­ri­tis in chronic kid­ney dis­ease pa­tients. The drug scored a 68% drop in av­er­age itch­ing scores in the first part of its Phase 2/3 study.

ImmunoGen Inc. (Nasdaq:IMGN) closed the week up $1.48, or 32%, to $6.06. There doesn’t seem to be any obvious news to support this substantial gain that started the previous Friday. Some of the reason for the excitement could be coming from BIO, the biotech industry’s annual trade show, which isn’t typically a conference that drives a lot of news. Waltham, MA-based ImmunoGen’s larger-than-average move makes one think that there’s some kind of leak of information.

And Exelixis Inc. (Nasdaq:EXEL) leaped $4.52, or 24%, to $23.78. Several innovative new ways of fighting cancer are generating excitement in the oncology community. Among investors, leading the pack are companies like South San Francisco-based Exelixis, whose stock has more than tripled over the last 12 months. Much of the investing argument for Exelixis is tied to Cabometyx, approved in April 2016 as a second-line treatment for renal cell carcinoma.

Meanwhile, hospitals, in particular, have benefited from Obamacare’s coverage expansion. HCA Healthcare Inc. closed the week up 3% at $86.24, while Tenet Healthcare Corp. gained 2% to $18.52.

Among large insurers, Aetna rose 1% to $152.10 and UnitedHealth Group added 2% to $185.25. Insurers that specialize in Medicaid also gained, with Centene Corp. up 7% to $84.15 and Molina Healthcare rising 4% to $71.33.

“We see the draft version of the Senate bill as better than expected and driving the out-performance particularly in our facilities coverage and also for our managed care names,” Leerink analyst Ana Gupte said in a research note.

Biotech stocks continued to fuel the sector. The Nasdaq Biotechnology index closed the week up an eye-popping 9%. Biotech appeared to be benefiting from recent reports suggesting efforts by the Trump administration to rein in drug prices would be not be as harsh on the industry as feared.

Steve’s Take:

In some ways, this feels evocative of the tumultuous years of the first dot-com bubble. The companies involved are different in significant ways–most are profitable, for example. And yet, as investors chase growth, propaganda and anticipation have in some cases replaced fundamentals and rationality. Many investors, against their better judgment, are again getting caught in the hype.

The scale of the recent surge in health care, and tech generally, is mind boggling. Investor inflows into tech stocks is at a 15-year high. Anthony Mirhaydari at The Financial Times points out that the market cap of many tech giants is greater than the economic output of many large cities.

According to Bank of America Merrill Lynch, Alphabet is bigger than Chicago and Amazon bigger than Washington, DC. And at $1.45 trillion, the combined market cap of Alphabet and Apple is larger than the combined market cap of all Eurozone and Japanese banks.

Financial guru Jim Cramer relishes analyzing the stock market’s valuation when commentary suggests that it has run too far, too fast and is too expensive.

“I want to tackle head-on the notion that the Nasdaq is overvalued, something we heard a lot of chatter about [when] the index blasted through the 6000 level, and whenever we crash through big round numbers, it tends to cause instant soul-searching,” the TV host recently said to Elizabeth Gurdus at CNBC.

When the Nasdaq sees a big run, people tend to recall the last time it skyrocketed, Cramer said. In this case, it happens to be early 2000, when the index approached 5000 then plunged thousands of points, crushing an entire class of investors.

To Cramer, the comparison feels somewhat forced. The companies that drove the Nasdaq to 5000 back then ended up either being overvalued or, in Cramer’s words, “plain old worthless.”

“Even though the Nasdaq 100 is up [19%] year to date, I refuse to call it overvalued not only versus 2000, but compared to many other eras that I have to admit seemed a lot less risky,” Cramer said. “One more reason to stay the course and do some buying if this darn market would ever give you a pullback.”

The biggest impact of the Republican repeal effort is arguably on Medicaid. The House bill would cut $834 billion in spending on the program, according to the Congressional Budget Office, by ending the ACA’s expansion of it and changing it from an open-ended entitlement to one with caps on spending.

The Senate version–according to a discussion draft released Thursday–contains even larger Medicaid cuts. They’re just delayed a few years. We won’t know exactly how big the cuts will be until the CBO shares its score of the new bill this week. But they’ll be large, and they will dampen the revenue and profits of healthcare providers.

Yet shares of insurers and hospitals exposed to Medicaid reacted positively to the bill, which offers the industry some short-term relief.

Still, some healthcare investors seem to be ignoring an eventual time bomb, says Max Nisen at Bloomberg.

The Senate bill diverges from the House version in two major ways when it comes to Medicaid. First, the ACA’s expansion of the program will end gradually starting in 2021, instead of ending more abruptly in 2020. That’s a legitimate boost for healthcare providers.

Second, the House bill ties Medicaid’s growth rate to medical inflation, plus an extra 1% for older and disabled beneficiaries. That alone would result in a big funding cut relative to current law, under which federal spending increases as needed to cover costs. The Senate version matches the House’s growth rate until 2024. But after that, it will limit the growth rate to a much lower measure of general inflation, leading to even more massive cuts than the House bill would cause.

Nisen cited a research note from Mizuho’s Sheryl Skolnick, evocatively titled “Lots Less Worse Short-Term; Lots More Worse Long Term.” Skolnick points out Medicaid expansion has been one of the few sources of volume growth for hospitals over the past few years. In 2014, the ACA’s Medicaid expansion helped equivalent admissions grow by 10% for a basket of US hospitals tracked by Bloomberg Intelligence.

The ACA and the Medicaid expansion in particular have been big boosts for hospital chains. The Senate health will end this growth and boost the number of non-paying patients hospitals must treat. Medicaid isn’t everything for these hospitals, but it’s not trivial.

Bottom Line:

For healthcare investors, the positive features contained in the GOP Senate Bill and President Trump’s executive order addressing drug prices most likely won’t (or can’t) be reversed or dismantled until 2020 at the earliest.

Of course, biotech startups will have their failed drugs and some stocks will tank. High-risk/high-reward gambles have been and always will be hazardous. Established biotech names, on the other hand, seem out of harm’s way for now.

Steve's Take: + changes by @POTUS can't be undone until 2020, good for #healthcare investors Click To Tweet

True, the GOP effort to demolish Obamacare may fail, but that also bodes well for healthcare stocks. If the Senate bill in its present form becomes law, there are provisions favorable to the health sector in the near term that will sunset–mostly after 2020.

That’s a long time from these cheerful days in most shareholders’ investment horizons.

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