By Caroline Valetkevitch and Caroline Humer
NEW YORK, Oct 23 (Reuters) - After a four-year love affair
with healthcare shares, investors are moving on.
Selling has spread from biotechs - shaken on Sept. 21 when
Hillary Clinton first tweeted concerns about drug prices - to
other areas of the healthcare sector. Investors have been
dumping shares of everything from hospitals to traditional
pharmaceutical companies and insurers in recent weeks.
Since peaking in July, the Nasdaq Biotech Index .NBI has
fallen 23 percent, the broad S&P Health Care Index .SPXHC has
lost 12 percent and the S&P 500 Health Care Facilities index
.SPLRCHCLT is down 31 percent.
Fund managers now say they expect myriad pressures weighing
on the sector for the rest of the year and possibly into 2016.
They include regulatory threats on drug prices, disappointing
earnings, higher interest rates that could hurt heavily-indebted
hospitals, and the loss of the initial Obamacare bump in
business.
Profit warnings from two companies since last week - HCA
Holdings HCA.N and Community Health Systems CYH.N - have
pummeled shares of hospital operators. The health facilities
index is down 13 percent since its Oct. 14 close.
"The best case through the end of year is range-bound for
healthcare, maybe biased downward slightly," said Les
Funtleyder, healthcare portfolio manager at E Squared Asset
Management in New York.
The cautious attitude of investors is new for the S&P 500
healthcare sector .SPXHC , which has provided double-digit
returns every year since 2011.
That run-up, prompted in part by the addition of roughly 17
million people by the Affordable Care Act, as well as
expectations of financially rewarding mergers, may have left the
sector priced for only the best of news.
By July 20, the broad health care index was selling at a
forward price-to-earnings ratio of 18.7, higher than most other
sectors and a full percentage point higher than the broad S&P
500 index. That P/E ratio is down to about 16, in line with the
broader market.
"I think the more general sector rotation has probably
created a high bar for these companies, and I am a little
worried that meeting expectations isn't even enough," said Jeff
Jonas, portfolio manager at GAMCO Investors.
REASON FOR CAUTION
Third-quarter results could give investors further reason to
be cautious. Only half of the health care companies that have
reported their earnings thus far have beaten analysts estimates
on revenues.
Next week brings results from hospital operator LifePoint
Health LPNT.O as well as from insurers Anthem ANTM.N and
Aetna (N:AET) AET.N . Shares of UnitedHealth Group Inc (N:UNH) UNH.N fell
last week even though its third-quarter profit was slightly
better-than-expected.
One issue for hospitals and insurers is that most of those
healthcare consumers who were added because of the Affordable
Care Act were already enrolled last year - so this year's
revenues and earnings will be measured off of a
fully-implemented baseline for the reform law.
In its forecast late Wednesday, Community Health Systems
cited lower hospital admissions and estimated third-quarter
revenue below analysts' expectations, while HCA blamed higher
labor costs and more uninsured patients in its outlook last
week. urn:newsml:reuters.com:*:nL3N12M4DS
To be sure, the health sector still is seen as profitable,
with third-quarter earnings projected to be up 4.5 percent from
the same quarter a year ago.
But the move out of the sector has been rapid. The iShares
U.S. Pharmaceuticals exchange traded fund IHE.P posted $77.8
million in outflows in the third quarter, its largest quarterly
outflow since it started in 2006, and it has already lost $75
million in the first 22 days of the current quarter.
The iShares U.S. Health Care Providers ETF IHF.P , which
includes insurers and hospital operators, recorded its first
withdrawals this year in that quarter, and investors are
continuing to pull money out this quarter.
All of that is an especially sharp reversal of fortune from
the summer, when health care shares rallied after the U.S.
Supreme Court upheld the Obama health care law.