Health-sector investors hold breath as 2018 mercifully comes to a close; but what does 2019 portend? Anyone else cringe at prime-number years?

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As investors stagger toward the New Year, adjusting their neck braces for one final lap of trading on December 31, there’s one big consolation for the recent, massive, daily twists and turns: Health care is 2018’s top-performing sector.

In November, healthcare stocks emerged as investors’ favorites, says Swarup Gupta for Zacks. The SPDR Health Care Select Sector fund (“XLV”), for example, gained 8.2% over the previous month, emerging as the leader among the S&P 500’s 11 sectors. Companies in this sector primarily include healthcare equipment and supplies, healthcare providers and services, biotechnology, and pharmaceuticals industries. Johnson & Johnson, Pfizer, UnitedHealth Group, Abbott Labs, Amgen and Medtronic are some of the Fund’s top 10 holdings. With stocks inching close to the bear-market territory, XLV closed the year up 3%.

Gupta says rapid innovation, major advances and the US’s ageing population have managed to sustain the popularity of healthcare stocks. Further, this is a defensive option which has caught the fancy of investors in difficult market conditions. With the economy likely to weaken and a gridlocked Congress unlikely to make major legislative changes, picking select healthcare stocks looks like a smart strategy for 2019.

Several roadblocks confronted healthcare this year and most of them had to do with the Affordable Care Act (ACA). The Trump administration has been trying to replace and repeal Obamacare since it began its term. And it succeeded to some extent this year, removing the individual mandate as part of its well-received tax cuts.

The abolishment of the individual mandate led a federal judge in Texas to declare that the ACA was unconstitutional. However, the law will remain in force until the time that all appeals are exhausted. Market watchers point out that time and again, the ACA has proved hard to kill. An appeals court is likely to overturn this latest ruling.

Also, 2018 was witness to heated mergers and acquisitions activity. Aetna sealed a $70 billion merger with pharmacy major CVS Health. Meanwhile, Cigna acquired Express Scripts for $54 billion. These developments illustrate a trend which seeks to reduce healthcare costs by creating a single entity which offers both medical and drug benefits. The trend is likely to continue next year, revitalizing the sector with further mergers and acquisitions activity.

Overall, 2019 is likely to be another year filled with innovations and new technologies, Gupta argues. Players from outside the sector are also likely to step into the healthcare space. This is patently clear from the efforts of Amazon, JPMorgan and Berkshire Hathaway to provide healthcare benefits to one million employees. Longer term, the venture is an attempt to enter the ever irrepressible $3.5 trillion healthcare industry.

With uncertainty in the markets, Olivia Engel, chief investment officer of active quantitative strategies at State Street Global Advisors, agreeing with Gupta, says investors should focus on defensive sectors, such as health care. Over the last 10 years, health care has done well, in part because of demographics with an aging population, she says. Even though it’s traditionally considered a defensive sector, health care also benefits from higher earnings growth. To find reasonably priced companies, Engel recommends looking in the “more boring parts of health care” rather than the high-growth areas.

Steve’s Take:

After dusting ourselves off from the bombshell blasts to healthcare stocks, first in March, then again in October, and finally on December 24, we look around at the investment landscape and say…Well, we’re actually ahead of all the other 10 industrial sectors of the S&P 500. Maybe 2018 wasn’t as bad as we thought.

Yes, but being up 3% for the year transpired after falling some 8% from all-time highs. Still not horrible, but what the heck is coming at us in 2019?

Frankly I’ve never liked prime-number years, and 2019 is another one. So I went to my friends at Medical Marketing and Media for their survey of industry execs on 2019 trends, events and policies. In a nutshell, the healthcare industry expects a relaxation on drug pricing pressures and an expansion to access. Good and good. Here are the predictions, hunches, and informed guesses of the experts MMM surveyed from a range of sector businesses.

Digital health will continue its surge

Larry Mickelberg
Managing director, Deloitte Digital

Enabled by personalized tech, pharma and medical device companies will soon be able to deliver tailored treatments to individuals, backed by real-time service and support. As we enter 2019, marketers are planting the seeds for this augmented age of healthcare with ecosystems that can intelligently respond to needs through sensing with data analytics, agile creative and automated platforms working in concert to deliver resonant content, and personalized experiences to be distributed widely across the health journey.

An October 2018 Deloitte survey found 82% of early AI adopters are ramping up investments and cite positive ROI. And for good reason — AI presents a fresh opportunity for marketers to use real-time insights to inform their work, with help from data scientists to understand the insights generated by machines. Voice is similarly going to become an important node, as digital agents will become more clinically validated. This will enable more automated self-help, coaching, and condition management, via conversational interfaces across devices and screens.

Pharma will have its Cambridge Analytica moment

Fabio Gratton
Founder and chief alchemist, Alchemy Factory

It seems a day doesn’t pass without the sighting of an ominous headline about a recently discovered data breach from a company maintaining hundreds of millions of consumer records. Collectively, the billions of records stolen through the hacks of Equifax; Facebook; Orbitz; Saks Fifth Avenue; Panera; Yahoo; Under Armour; and Marriott cover the identities of a majority of all US adults.

Ironically, the biggest data breach story of the year, perpetrated by Cambridge Analytica, was actually not a data breach. The method used to collect what is believed to be more than 50 million Facebook user profiles was legal and involved a widely-known and frequently exploited feature that Facebook app developers, until recently, could leverage. The feature enabled their apps to capture users’ interests and social graphs and those of their friends.

For the most part, this data was used by developers for data mining and ad retargeting. What made this particular incident so egregious is how this feature was exploited through a survey app to collect user data and build unique psychographic voter profiles.

Although Facebook apps can no longer collect this level of data, the ability for any website to collect information about you and your search, browsing, or buying behavior is still very much alive.

In fact, pharma advertisers — and their media partners —rely almost exclusively on the ability to track user behavior in this fashion, thus enabling them to retarget people with relevant ads based on their online activities, such as keywords they’ve typed into Google, articles they’ve read on WebMD, and items they’ve purchased on CVS’s online pharmacy.

But that’s not all. Once they’ve collected sufficient info about a user, companies can cross-reference the supposed anonymized user data with other readily-available data sources to identify exactly who someone is, thus de-identifying data that was supposed to only be used in aggregate.

So what happens when pharma has its Cambridge Analytica moment? Unlike a credit card, which can be canceled or replaced, what gets revealed about someone’s health status is a bell that cannot be unrung. Don’t discount the possibility of a WikiLeaks-type event, where millions of people’s personal health records are made publicly available for the world to see. That will be interesting.

Changes for tech, pre-existing conditions, employer healthcare costs

Amit Phull, MD
VP of strategy and insights, Doximity

Tech will extend its healthcare reach: In 2018, we saw more companies move into the healthcare sector, and these mergers may change the way prescriptions and eldercare services are delivered. Amazon is already revving up for the expansion of PillPack, with a new prescribing license in Washington state and pending licenses in Indiana and New Mexico.

In September, Apple unveiled the Apple Watch Series 4 with the new capability to screen heart rhythms and send a notification if it detects an abnormal heartbeat that may appear to be atrial fibrillation.

Because AFib, which affects between 2.7 million and 6.1 million Americans, can lead to blood clots, strokes, and other complications, this wearable has the capability to help save lives. It is also the first consumer device to receive FDA clearance for ECG monitoring. The extent of data we can collect from wearables is going to increase substantially, allowing patients to be monitored in real time.

The future of pre-existing conditions will remain murky: Healthcare was front and center in the 2018 midterm elections, topping the economy as the biggest issue among voters. With Democrats winning the House, Affordable Care Act repeal seems to be dead for at least another two years. Yet last year, a coalition of 20 states–including nine of the 11 states with the highest rates of pre-existing conditions–filed a lawsuit alleging Obamacare is unconstitutional.

Whether the ACA safety net for pre-existing conditions goes away as a result of this lawsuit or via future legislation, there exists a need for new approaches to care for patients with these ailments. The care team model will need to evolve to accommodate the reality that although people are living longer, they are often in poorer health.

Digital and personalized care revolutions will continue

Kyle Amelung
Senior manager, Express Scripts

While the healthcare industry has lagged behind others in offering convenient, connected customer service, it is making strides with meaningful changes that improve patient outcomes. Expectations for more patient-centric care will continue to rise.

Digital solutions, such as electronic prior authorizations, clinical direct messaging, and real-time prescription benefit information will become the norm, not the exception. Greater adoption of this tech will be critical as specialty drug spending is estimated to increase close to 50% in the next two years. These new, high-cost therapies require plans to better manage appropriate use via prior authorization.

Patients are also looking for more ways to take the driver’s seat in their own care. Personalized digital devices allow patients with chronic conditions, such as diabetes and hypertension, to better manage their nutrition, stress, and medication adherence. Putting the right tools in the hands of patients will improve clinical engagement, resulting in better care experiences, better health outcomes, and lower costs.

Access, opioids will top priority list for pharmacy benefit managers

Jonathan Gavras, MD
SVP and chief medical officer, Prime Therapeutics

Providing access to safe, effective and affordable medications will continue to be a priority for pharmacy benefit managers in 2019. In recent years, we’ve seen an acceleration of FDA drug approvals–a record 46 novel drug approvals in 2017, and more than 50 in 2018.

The FDA has even fast-tracked approval of some orphan and oncology drugs that only have Phase 1 or 2 clinical data available. The number of approved biosimilars is also increasing, but many have not yet launched to drive anticipated savings.

Also in the specialty drug market, new, personalized treatments such as CAR-T and gene therapy will continue to come to market with very high price tags, in part because they cannot be self-administered. These infusions are managed as drugs, but they’re really treatments that process on the medical benefit.

Another issue that will continue to be a focus is curbing opioid misuse. In 2010, Prime Therapeutics began identifying individuals at risk for opioid abuse using a controlled substance scoring system. This score helps feed a progressively intensive set of clinical programs, including personalized case management, while a fraud and waste system helps identify misuse and abuse.

Managing medicines today calls for a fresh approach, where all members of the healthcare delivery system work together to look holistically at individuals, and create comprehensive care solutions aimed at improving their health outcomes, while keeping their total cost of care in check.

Bottom Line:

The prospects for the healthcare sector will remain largely unwithered in 2019, thanks in no small measure to America’s ageing population. That’s my crowd. This is why it makes sense to add healthcare stocks to your portfolio for next year if you don’t already have them.

Next week I’ll begin 2019 with my suggestions for several healthcare ETF’s that I would recommend to the low- to-moderate risk investors with a 10 year-plus investment horizon.

HAPPY NEW YEAR!!

Steve Walker

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