Health care “safe haven” status seemingly in question

Some investors consider health care stocks to be safe havens, but recent developments suggest that status has been called into question.

Traders, perhaps taking heed of political risk, seem to not be giving health care companies the benefit of the doubt. Some names in the space are struggling these days even as other stocks sometimes labelled as “safety plays” outperform.

First, consider health care’s correlation to utilities. Many view these sectors as less vulnerable to fickle economic swings than industrials or retailers. Some historic number crunching shows the two groups mostly tracking each other since at least 2010. But that long-running "positive correlation" turned "negative" in April. Yep, for the first time this decade, health care and utilities are moving in opposite directions. Certainly food for thought.

Next, consider some of the headlines. Politicians in Washington may have failed to repeal the Patient Protection and Affordable Care Act last month, but they have been setting their sights on pharmaceutical makers in connection to the spreading abuse of opioid painkillers in the U.S. A special Senate committee formed on March 28 to investigate, among other things, whether painkillers were over-subscribed to boost drug sales, and whether companies downplayed potential addiction risks.1

Live Action Top Decliners 4/18/17

Source: OptionsHouse by E*TRADE

Drug pricing emerged as an issue in last year’s presidential campaign, and has only become more contentious since. It’s stayed in the headlines, and yesterday reared its head to bite industry heavyweight Johnson & Johnson (NYSE: JNJ). Earnings beat estimates, but analysts said pricing pressure squeezed revenue.2 JNJ fell 3.1 percent, its biggest drop in over a year. If that wasn’t enough, a separate effort on Capitol Hill is now looking into how certain prices are set in the industry.3

Some other news stories have also punished companies: 

  • Cardinal Health (NYSE: CAH) yesterday also had its biggest decline in over a year. The culprit was pricing (again) and worries about its borrowing plans.4 Rivals AmerisourceBergen (NYSE: ABC) and McKesson (NYSE: MCK) tumbled about 5 percent as well.
  • Hospital operator HCA (NYSE: HCA) fell last week after earnings and revenue missed analyst forecasts.5 It’s remained below its 50-day moving average since. 
  • Biotech giant Amgen (NASDAQ: AMGN) has been under pressure since announcing disappointing data for a cholesterol drug on March 17.6 They also want to offer “rebates” to offset its high price. In other words, they’re under pricing pressure as well.

The weakness continued across the board yesterday, with the OptionsHouse by E*TRADE platform showing seven of the 10 worst-performing companies in the overall market in the health-care space. It was also the weakest overall sector with a drop of more than 1 percent in the session.

In summary, health care’s sentiment may be shifting.

1. CNBC: Opioid epidemic: Senate committee opens probe of five big painkiller makers. 3/28/17.

2. Reuters: J&J first quarter revenue misses estimates; new forecast includes Actelion. 4/18/17.

3. Business Insider: A top Democrat has introduced a bill that could fight skyrocketing drug prices. 3/15/17.

4. Wall Street Journal: Cardinal Health's $6.1 Billion Deal for Some Medtronic Operations Raises Debt Concerns. 4/18/17.

5. HCA Holdings stock slumps 2% after it warns of Q1 revenue, earnings miss. 4/17/17.

6. Business Insider: Amgen is getting whacked after disappointing study results for its $14,000 heart drug. 3/17/17.