Just one week before a new president is sworn in and the markets are adjusting themselves into the realism of a new administration.
Initially, the Trump victory saw a rally take us from November into 2017. But some stocks — and sectors — are coming under pressures that no one expected in the heady days just after the election.
Trump has been on Twitter attacking overpriced military equipment and in a recent press conference went after drug pricing and price gouging in the healthcare sector. This wasn’t expected and has been a sobering addition to the presidential party punch that traders have been drinking for the past two months.
Also, the replace/repeal talk about Obamacare is much more complicated to do than it is to say. And now that it’s on Republican shoulders, it will cost them a lot of political capital if they don’t get this right. Those risks create disarray in Congress, where everyone’s top priority is getting re-elected. Repealing Obamacare and wrecking your base in the process is not the preferable route to re-election.
These seven healthcare stocks are not doing well. And with new challenges ahead, they are now increasingly vulnerable and even more dangerous.
Healthcare Stocks to Avoid: Valeant (VRX)
Valeant Pharmaceuticals Intl Inc (NASDAQ:VRX) was one of those great pharma stories in 2013. A company that decided it could buy up drugs that other companies weren’t valuing correctly and raise prices. That means the companies VRX was buying from were undervaluing the purchase price of the drugs, leaving Valeant to profit by simply buying the drug and raising the price.
VRX stock began to soar. Until 2015. Early that year, Congress began to question why Valeant was raising prices so aggressively, especially on two of its heart drugs. Further research uncovered that VRX had raised the price of almost all its drugs by an average of 66%.
This news certainly didn’t sit well with investors. But the worst was yet to come. VRX was also running Philidor, a specialty pharmacy, unbeknownst to shareholders. That did it.
Valeant stock came crashing down and now the company is under serious legal pressure as well as financial pressure. It has started selling divisions to keep afloat, but that also means it’s losing the little revenue it has left while still trying to get some base hits with some of its drugs.
Hardly an ideal situation.
Healthcare Stocks to Avoid: Impax (IPXL)
Impax Laboratories Inc (NASDAQ:IPXL) is a smaller generics manufacturer with a few drugs on the market for Parkinsonism and migraines. While Obamacare has meant big things for generics, the environment has not been easy to navigate. If you recall the EpiPen debacle, then you know the challenges.
Basically, EpiPen was a brand name product made by another manufacturer who raised the price for this emergency allergy medication (basically a DIY shot of epinephrine for anaphylactic shock) by more than 400% over a period of a couple years.
IPXL sells a generic version that was initially about half the price of the EpiPen, but wasn’t on insurers’ approved drug lists. Now, health insurer Cigna Corporation (NYSE:CI) has approved IPXL’s generic version as an option and CVS Health Corp (NYSE:CVS) has cut the price to $109 for a two-pack. The EpiPen is running around $400.
That may sound great, but the fact is, many of IPXL’s product line has been through this cost cutting and that means margins have been falling. And that’s before the Great Healthcare Scare in Washington ratcheted up last year.
Healthcare Stocks to Avoid: Acorda (ACOR)
Acorda Therapeutics Inc (NASDAQ:ACOR) is a small drug company that has drugs in its stable. Its multiple sclerosis (MS) drug Ampyra is the biggest of the three. Its other drugs are Zanaflex, another MS drug, and Qutenza, a dermal patch to help with post-shingles neuralgia.
The problem is what many drug companies are now coming up against in the U.S. — a difficult environment to raise drug prices. This is evident in the fact that ACOR made news the first business day in January by announcing it was raising the price of Ampyra by almost 10% this year. ACOR stock is already off 44% in the past 12 months, and that news didn’t do it many favors on Jan. 3, the day of the announcement.
The problem is, the company is in one sector and its biggest market — the U.S. — is undergoing significant changes to how it buys drugs and the types of drugs it will buy. This means all drug manufacturers are going to have some tough times trying to manage costs while cutting prices.
And small companies will pay the highest price first.
Healthcare Stocks to Avoid: Mylan (MYL)
Mylan NV (NASDAQ:MYL) is the poster child for price-gouging drug companies. It even has lobbyists to coerce federal legislation that would benefit its EpiPen. I mean that poster child remark quite literally — Mylan’s CEO was called in front of the House and Senate to get a tongue lashing from politicians on the outrageous price hikes for such a necessary and yet simple drug.
In 2007, MYL bought EpiPen from another company. At the time, this DIY medication for allergies and bee stings had about $200 million in revenue. It’s now about a $1 billion product for MYL and accounts for 40% of MYL revenues. How did this happen? MYL raised the price of the EpiPen 400% since its initial acquisition. When it bought EpiPen a two-pack was selling for $57. It now retails for more than $400. That’s the cost of delivering a $1 generic dose of epinephrine.
Needless to say, things haven’t gone will for Mylan since all this was exposed. The stock is off 35% in the past 12 months.
And now, a generic version of the EpiPen has been approved by healthcare insurer Cigna and CVS is selling it for $100 a two-pack. That competition is going to hurt MYL as well.
Healthcare Stocks to Avoid: Vertex (VRTX)
Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) is a U.S.-based biotech that has been around since the late 1980s. Founded by a former Merck researcher, its goal was to discover drugs and get them out of the lab and into the hands of patients as quickly as possible.
It initially worked on the development of HIV drugs with Big Pharma partners around the world. It even discovered the protease crystal structure for hepatitis C in 1996.
But its own drugs are focused on the cystic fibrosis market. Specializing in diseases where there aren’t a lot of options is a good strategy for drug companies and it has served VRTX well. But the recent sector turmoil means a firm like VRTX becomes vulnerable.
The stock is off 14% in the past 12 months, but the outlook for 2017 is looking more like a weak year rather than a strong one. There’s no point in taking the risk that there is more downside than upside here.
Healthcare Stocks to Avoid: Allscripts (MDRX)
Allscripts Healthcare Solutions Inc (NASDAQ:MDRX) is healthcare IT services firm, allowing hospitals, private practices and health plans to build more efficient systems.
This effort was begun during the Obama administration, when it was mandated that all medical records needed to be digitized in the ensuing years. Electronic healthcare records (EHRs) started a major industry as companies stepped in to help medical professionals convert, store and analyze all their paper records to digital.
This has cost everyone a lot of money and has made a good business for EHR companies. MDRX is one of them. And while this digital tide can’t be stopped, it can be slowed. That’s what’s happening now. MDRX business is still expanding into the United Kingdom and elsewhere, but its U.S. operations aren’t growing as quickly as many had hoped.
Given the current unknowns in the U.S. healthcare sector, this isn’t a good time to be picking up MDRX, even after its 18% drop in the past 12 months.
Healthcare Stocks to Avoid: Prothena (PRTA)
Basically, immunotherapies are built to help the human immune system combat a given disease, rather than using the sheer force of a drug to do the work. This is one of the most promising new biotech sectors around today.
But just because PRTA may be in a hot sector is no reason to jump at this stock.
First, the company is headquartered in Ireland, like its old parent ELN. President Trump has already talked about repercussions for companies headquartered outside the U.S. that counts North America as its biggest market. This is a significant threat to its revenue stream if it comes to pass.
Also, PRTA has drugs in the pipeline, none on the market. This means all the pricing is based on successful drugs, but it’s all castles in the air. There’s no guarantee that the drugs will come to market or a timeline for PRTA to start making money.
Add in the uncertainty in pricing new drugs and you have a stock better to avoid until things clear up in the biotech sector.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.