According to Bain & Co. partner Nirad Jain, 2015 was a record-breaking year for healthcare companies as $540 billion traded hands through mergers and acquisitions and private equity deals.
Unfortunately for healthcare stocks as a whole, this hasn’t translated into broad enthusiasm. Although revenue for healthcare stocks will likely increase thanks to higher demand, accusations of improprieties within the industry have cast a dark shadow. That raises an unwanted challenge, especially as the current earnings season isn’t exactly a runaway winner.
The indelible image of Martin Shkreli — former CEO of Turing Pharmaceuticals — refusing to testify before Congress gave most Americans all the ammunition they needed to blast the broad healthcare sector. Here was a punk kid getting rich off of insider trading and drug price manipulation while tens of thousands of patients suffered from the subsequent financial burden.
Like clockwork, several candidates for the White House took up the cause, shining a judgmental light on healthcare stocks.
While lurid stories will always make headlines, the general reason for higher drug prices is fundamentally quite mundane. Both advances in biotechnology and the Food and Drug Administration’s willingness to play game have contributed to a surge of new treatments becoming available to the public.
Pharmaceutical companies with specific specialties were a big driver of supply. Sales of specialty drugs rang up $151 billion at the register last year, which was an increase of 20% from 2014 sales.
That’s not to excuse any of the pharmaceutical industry’s shenanigans. Real harm has occurred because of several controversial backroom antics. Also, there are serious questions about the overall economy as powerhouse companies have produced disappointing forecasts. And so, here are three healthcare stocks that will face extra scrutiny ahead of their earnings reports.
Healthcare Stocks Under a Microscope: Valeant Pharmaceuticals Intl Inc (VRX)
Can things get any uglier for Valeant Pharmaceuticals Intl Inc (VRX)?
That is really the only question investors will be asking. Anything else is like the placement of deck chairs on the Titanic. Over the trailing 52 weeks, VRX stock briefly exceeded $260 a pop. Today, those shares are down to around $35, or an 86% loss in the markets.
Controversies stemming from accounting irregularities, combined with sharply reduced guidance for 2016, have contributed to the malaise in VRX.
Year-to-date, VRX stock is down about 65%, which is not the type of performance you want heading into your first quarter of fiscal year 2016 earnings result. The earnings per share target for VRX is $1.37, down almost a dollar from the year-ago quarter’s consensus estimate.
What’s worse, VRX is in uncharted territory. Valeant produced a string of earnings beats until things started to unravel in Q4 FY2015. Wall Street will want to see exceptionally strong numbers to even consider VRX as a viable opportunity.
A clean 10-K filing could do it. However, that’s far from a safe bet.
In addition, the balance sheet has been saddled with a ballooning debt exposure since the 2008 financial crisis. VRX has already warned about a potential default on debt, which really hampers their credibility. Although they’re not necessarily at risk for going under, it’s going to take some time for Valeant to get things in order.
While it’s tempting to view VRX as a contrarian play, it’s also an incredibly speculative perspective. Until management can really plug the holes in their business, it’s much safer to sit this one out.
Healthcare Stocks Under a Microscope: Perrigo Company (PRGO)
Perhaps no other company in the healthcare sector is having as bad a start to 2016 as Perrigo Company (PRGO).
After making a slight gain in January, PRGO has stared at a wall of red ink. On a YTD basis, shares are down nearly 31%. Preliminary reports for Q1 sales are below consensus estimates. Pricing challenges and a tough competitive environment forced PRGO to reduce this year’s earnings guidance. There are also some hiccups with Perrigo’s acquisition of Omega Pharma.
But dominating headlines is the coup d’état pulled by rival Valeant.
Former PRGO head Joseph Papa is now in the captain’s seat for VRX. That’s a major plus for the down-in-the-dumps pharmaceutical company, which should benefit their long journey to credibility. The problem for PRGO is that it is now left without one of the healthcare industry’s most prized human assets.
Papa’s replacement, John Hendrickson, is somewhat of a wild card because not much is known about him.
Looking ahead to its Q1 FY2016 report, analysts expect PRGO to hit an EPS of $1.89. This is 11 cents higher than the year-ago quarter’s estimate. That might be a bit of a tall order considering the markets’ reaction to the sales disappointment.
The other issue to consider is a potential takeover bid, especially if a weak earnings result further discounts the value of PRGO stock.
For Perrigo’s new CEO, this is a baptism by fire. Unfortunately, there’s little time for PRGO to make a cohesive case to its shareholders.
Healthcare Stocks Under a Microscope: AbbVie Inc (ABBV)
On the more positive side among healthcare stocks is AbbVie Inc. (ABBV).
Unlike VRX or PRGO, ABBV has a much more positive outlook, with a 3% YTD performance. AbbVie’s partnership with Roche Holding Ltd. (ADR) (RHHBY) for a leukemia fighting drug won early approval from the FDA.
Better yet, the treatment has shown encouraging signs under clinical testing, leading to the expedited approval. ABBV is also aggressively expanding its oncology portfolio with key asset acquisitions.
That’s not to say that ABBV doesn’t have its fair share of challenges. Primarily, the current drug pricing issue will be a concern moving forward. Although ABBV shows a steady increase in annual revenue trends over the past seven years, net income growth is comparatively inconsistent. That is in line with industry developments, where companies are sacrificing profitability with rebates and financial assistance programs to help patients cope with rising healthcare costs.
There is also evidence to suggest that specialty drugs may go through a demand surge upon introduction, but then peter out as the treatment becomes widely distributed. Such trends are negatively impacting hepatitis C therapies offered by ABBV.
It’s also an important factor to consider for AbbVie’s Q1 FY2016 earnings report. Analysts have high hopes for ABBV, pegging EPS estimates at $1.14, or 29 cents higher than the Q1 target from the year prior. However, based on the general sentiment towards the healthcare industry, there may be a risk of overconfidence.
Ultimately, ABBV is a good stock in a very pressured environment. It may be better to wait until some ongoing industry concerns are addressed.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.