Health investors get selective as US markets churn into 2019

Bloomberg

Healthcare investors may have to be a bit more selective than they’re used to in 2019. With US health stocks poised to wrap up their second straight year of outperforming the broader market, the focus on hunting for innovation and next year’s winners is even more in vogue after recent market volatility.
Small- to mid-cap biotechnology darlings that saw shares surge amid a seemingly never-ending bull market have been punished and high-flying device makers ran cold, causing some investors to sell out of positions hand over fist. For those looking to pick new investments or add to positions on companies that have fallen out of bed, the time may be now.
“There’s an opportunity to outperform in healthcare, but it’s a bit more stock as opposed to industry specific going forward,” BNP Paribas Asset Management portfolio manager Jon Stephenson said in a telephone interview.
The Health Care Select Sector SPDR Fund, known by its ticker XLV, remains up more than 10 percent this year, while the S&P 500 Index erased gains. Even with that outperformance, some groups like large-cap biotech remain near record low multiples, presenting an opportunity, Jefferies healthcare specialist Jared Holz noted.
Here’s where some buy-side and sell-side observers are focussed for the coming year:

BIOPHARMACEUTICALS
Mizuho (Salim Syed): “Smid-caps are just much cheaper, and while you have to be selective, that’s where a lot of the innovation is at,” he said. “For general investors, there needs to be some improvement on the macro front where drug pricing isn’t as much of a risk.”
Jefferies (Jared Holz): “There’s much less upside in some of the large-cap pharma names” like Eli Lilly & Co and Pfizer Inc, given the recent sector run-up made them more appropriately priced compared with the broader market.

SPECIALTY AND GENERIC PHARMACEUTICALS
Mizuho (Irina Koffler): “A lot of these companies have to do M&A in spite of having to de-lever,” she said, noting potential deals for drugmakers in her coverage are-n’t going to be “anything too revolutionary.” Some of the focus to start the year will be on comme-ntary for 2019 guidance and ma-nagement teams’ ability to meet or exceed expectations, she said.
RBC Capital Markets (Randall Stanicky): “Aggressive re-positioning has set the group up for improved performance” in the second half of 2019, “with three years of generic down-cycle behind us.” A potential correction on improving fundamentals “should set the generic sector up well this year,” he wrote, noting “macro uncertainty is a swing factor and the generic sector is not a defensive response.”

MEDICAL DEVICES, TOOLS
Goldman Sachs (Isaac Ro): Bullish outlook for innovation across the industry with a “more dovish US regulatory backdrop still underappreciated,” though valuations remain elevated despite the recent market pullback. Continue to prefer names where a path to share upside “is tangible via new product cycles.”
William Blair (Margaret Kaczor): Expect companies to “build out reimbursement groups and contracts that may improve and simplify patient access to technology.” Look for “M&A and IPO activity as growth remains scarce, players look to consolidate the market, and balance sheets remain cash rich,” though smaller deals are most likely.