Fears Over Health Stocks Wipe Out $150 Billion in Four Days

The drubbing in the health care sector spread to pharmaceutical companies this week, with investors bloodied by a rout that left stocks trading near their lows of the year.

About $150 billion of market value was erased from companies in the S&P 500 Health Care Index in the four days through Thursday, when markets closed for the holiday weekend. The 4.4% decline left the gauge trading around lowest level since Jan. 3.

"This is third-worst that I've seen probably in the last 10 years," Christian Fay, who helps manage $3.6 billion at BNP Paribas Asset Management, said in a telephone interview. "We're just going to watch it, reassess it on Monday."

The sell-off is being driven largely by competing policy proposals in Congress, including a move to replace private medical benefits with a government-run system, that threaten to bring a long period of uncertainty to the industry. While the broader industry index managed to eke out a small gain Thursday as technical indicators flashed oversold signals and analysts reiterated bullish calls, biotech and pharmaceutical stocks plunged.

Pfizer Inc. and Merck & Co. each fell about 1%. They were last year's top gainers in the Dow Jones Industrial Average and now are among 2019's biggest laggards — after UnitedHealth Group Inc. and Walgreens Boots Alliance Inc.

One Danger: Exposure to Medicare

Hospital and insurance stocks were among the week's worst performers. HCA Healthcare Inc. slid 9.9% and traded at its lowest price since July.

"Clearly, huge stock impacts to HCA and managed care can't be ignored and 'collateral damage' to sub-sectors like biopharma in the following days are reflective of a view that mutual funds are drawing down and souring" on health care, Jefferies analyst Michael Yee wrote in a note.

Yee pointed out that the SPDR S&P Biotech ETF was still up 18% for the year through Wednesday and said "there's no reason momentum can't drive it another 10% lower from here" into earnings, which is seasonally weak for biopharma anyway.

Deeply indebted companies and those with medicines heavily used by Medicare recipients or subject to rebating, such as Bausch Health Cos., may be most exposed to the selling pressure, according to Wells Fargo's David Maris. Smaller generic companies or those with cash pay products should be better insulated from sector concerns, although so far "that has not been the case," he wrote in a note.

A Time to Buy?

Evercore ISI analyst Umer Raffat, in a research note to clients, tried to calm investors' nerves, underscoring the high costs that proposals such as "Medicare for All" would entail, if passed.

"Sure — you can't argue with the tide on drug pricing into elections next year — and perhaps that's effectively what is driving the stock moves," Raffat wrote. "But I seriously question how practical some of the proposals are."

Leerink's Ana Gupte, who has covered the managed-care industry for 12 years, called the recent weakness a "once in a decade opportunity" to get high-quality names at depressed valuations. "This time is indeed different," she wrote in a research note.

— Read UnitedHealth and AMA Propose Diagnosis Code for 'Unable to Pay for Prescriptions', on ThinkAdvisor.

— Connect with ThinkAdvisor Life/Health on LinkedIn and Twitter.