Here we go again.
The S&P 500 healthcare sector fell 4.4% two weeks ago, its worst weekly decline since late December. The move ended with more than 93% of healthcare stocks trading below their 20-day moving averages, a short-term technical indicator, according to Andrew Thrasher of Thrasher Analytics.
But fasten your neck braces because stock-price whiplash just struck…again.
Healthcare’s sharp drop came as investors worry that left-leaning policy ideas such as universal health coverage are gaining support, which could hinder corporate profits for companies in the space, says CNBC.
“Because this latest move was largely caused by political hot air (so to speak) and not something structural within the sector, I think we could see a bounce back in some of these names,” Thrasher said in a note to clients. “I believe the stocks have been over-extended to the downside.”
The implosion began after presidential hopeful Sen. Bernie Sanders received a positive response to his “Medicare for All” plan at a town hall organized by Fox News.
“What we’re talking about is stability. That when you have a Medicare for all, it is there now and it will be there in the future,” Sanders said at the town hall.
The plan creates a single-payer healthcare system run by the government, which Sanders argues would be more affordable for consumers.
Worries increased after UnitedHealth Group CEO David Wichmann warned that such policies would “destabilize the nation’s health system.” That comment sent UnitedHealth shares down 4% and the healthcare sector down 2%.
Health care is by far the worst-performing sector this year. It is down 1.2% in 2019 and is the only one trading in negative territory. By comparison, utilities is the second-worst performer of 2019 and it is up about 8%.
Biogen, Cigna and Abiomed are the worst-performing stocks in the sector, falling at least 20%. CVS Health is also down nearly 20% year to date.
This is not the first time healthcare related stocks have taken a beating amid worries leading up to a presidential election. The iShares Nasdaq Biotechnology ETF (IBB) came under sharp pressure in 2015 after former Secretary of State Hillary Clinton–then the favorite to win the 2016 election–tweeted against drug-price gouging, calling it “outrageous.”
“Ever since Obamacare, it’s been tough on these stocks pre-election season because they make the drug companies out to be the bad guys,” said Maris Ogg, president at Tower Bridge Advisors. Ogg added the current pullback in health care “probably won’t last because, at some point, earnings will overtake fears. But I do think we’ll hear a lot of health care bashing.”
Only a handful of healthcare companies have posted first-quarter earnings results, but the sector is outperforming all others. The sector’s blended earnings growth–which takes into account the expected earnings growth and reported growth rates–was 4.7% as of April 15, according to FactSet.
Robert Pavlik, chief investment strategist at SlateStone Wealth, said the drop in health care is a buying opportunity, but it will be a bumpy ride higher for investors as political rhetoric around health care will keep growing.
“There’s probably some more downside near term,” Pavlik said. “With that kind of talk permeating the landscape, you can only imagine that–even though you think these are great long-term companies–there’s probably going to be some weak hands that are not going to be able to withstand that talk.”
According to Schwab, positive factors for the healthcare sector include:
- Increased need for services: An aging population requires more extensive drug treatments and medical care. The health issues associated with obesity also could boost demand for medical services.
- Strong financials: Balance sheets in the healthcare sector remain flush with cash, increasing the possibility of higher dividend payments, share-enhancing stock buybacks, and mergers and acquisitions.
Negative factors for the healthcare sector include:
- Regulatory uncertainty: Entering a political campaign season that includes a presidential election where health care is likely to be the center of many political campaigns, volatility is likely to increase at times.
- Government takeover concerns: If investors increasing believe the “Medicare for all” rhetoric is going to come to fruition, it would likely be a very negative development for the healthcare sector.
- Fiscal policy concerns: The current fiscal situation in Washington creates uncertainty regarding the healthcare sector. Certain funding mechanisms could be changed as Congress deals with growing deficits.
Let’s look at last week’s action, where the healthcare sector roared back 3.90% from the beating it took the previous week:
X4 Pharmaceuticals Inc. (Nasdaq:XFOR) led advancing issues, rocketing 38% over the week to $19.38 on no company specific news…a common occurrence last week. Cambridge, MA-based X4 is a clinical-stage biopharmaceutical company. It is focused on the discovery, development and commercialization of novel therapeutics for the treatment of rare diseases. The company’s product candidates include X4P-001, X4P-002 and X4P-003 which are in clinical stage.
Also rising on no attending news was ShockWave Medical Inc. (Nasdaq:SWAV), surging 37% to $41.34. ShockWave Medical is a medical device company focused on developing and commercializing products for medical device treatment of atherosclerotic cardiovascular disease. ShockWave is based in Santa Clara, CA.
Then there’s Zynerba Pharma Inc. (Nasdaq:ZYNE), leaping 36% to $10.99 with no news to account for the boost. Zynerba is a specialty pharmaceutical company which focuses on developing and commercializing proprietary synthetic cannabinoid therapeutics formulated for transdermal delivery. Its product candidates which are in clinical trial stage include ZYN002 and ZYN001 synthetic transdermal cannabinoid therapeutics for indications including refractory epilepsy, Fragile X syndrome, osteoarthritis, fibromyalgia and peripheral neuropathic pain. Zynerba is headquartered in Devon, PA.
And Vaccinex Inc. (Nasdaq:VCNX) jumped 31% to $6.75 without a hint of news. Vaccinex is a clinical-stage immunotherapy company. It engages in the discovery and development of biotherapeutics to treat serious diseases and conditions with unmet medical needs, including cancer, neurodegenerative diseases and autoimmune disorders. The company’s product pipeline consists of VX15, VX5 and VX25 which are in clinical stage. Vaccinex is based in Rochester, NY.
Finally, a stock moved higher on actual news. Aclaris Therapeutics Inc. (Nasdaq:ACRS), a physician-led biopharmaceutical company focused on immuno-inflammatory and dermatological diseases, raced 28% to $27.90. The Wayne, PA-based firm announced that the US Patent and Trademark Office issued US covering methods of treating alopecia areata (AA) using ruxolitinib or isotopic forms of ruxolitinib. This newly issued patent is the latest in a series of patents granted by the USPTO which are exclusively licensed to Aclaris by The Trustees of Columbia University in the City of New York in connection with Aclaris’s janus kinase (JAK) inhibitor program for hair loss disorders, like AA.
But Avalon GloboCare Inc. (Nasdaq:AVCO) plummeted 41% to $2.81 in reaction to its direct offering of units to institutional investors. Specifically, it has agreed to sell 1,714,288 units at $3.50 per unit yielding gross proceeds of ~$6M. Each unit consists of one common share and one five-year warrant to purchase one common share at $3.50. Who can blame current shareholders for the massive dilution? Avalon GloboCare outsources healthcare services. The company provides healthcare management which comprises cell-based technologies and therapeutics, genomic diagnostics and precision medicine, international health and telemedicine. It operates primarily in China and US. Avalon GloboCare is headquartered in Freehold, NJ.