Earnings season is now winding down and very little has changed in the healthcare sector. Hospitals in the U.S. are still being cautious with their capital spending, while European health systems are pushing back hard on prices for both devices and drugs. Companies with differentiated products are doing well (Abbott Labs' (NYSE:ABT) Humira, Edwards Lifesciences' (NYSE:EW) transcatheter heart valve), Intuitive Surgical's (Nasdaq:ISRG) DaVinci surgical robot and tools), but general trends seem more like "muddle through" right now.
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A Relatively Quiet Stretch at the FDA
Investors should probably not expect many FDA-driven catalysts over the next week or so. While the FDA granted approval to Amarin's (Nasdaq:AMRN) Vascepa on July 26th and word is still pending (as of the time of this writing) on Salix's (Nasdaq:SLXP) Relistor for opioid-induced constipation, the PDUFA date for Zaltrap, an oncology drug shared between Sanofi (NYSE:SNY) and Regeneron (Nasdaq:REGN) falls late next week. Likewise, there are no FDA meetings of significance on the schedule.
Pfizer (NYSE:PFE), Hologic (Nasdaq:HOLX) and Allergan (NYSE:AGN) are the biggest names on the docket to report earnings next week. Expectations for Pfizer are low, as generic pressures (tied in part to Lipitor) have led analysts to expect a greater than 10% year-on-year decline in revenue. Growth expectations for Hologic are likewise muted (5-6% revenue growth) given the environment for capital equipment and womens' health diagnostics. Expectations for Allergan likewise call for just 6% growth as the company balances reasonably steady demand for prescription products and more economically sensitive demand for aesthetic products and procedures.
SEE: Investing In The Healthcare Sector
Value Skewing Large
With growth in short supply, investors are bidding up most of the healthcare growth stories to relatively high valuations. Even with modestly disappointing earnings, companies like Intuitive Surgical and Cepheid (Nasdaq:CPHD) are hardly bargains, and likewise companies like Edwards Lifesciences and Thoratec (Nasdaq:THOR) are no great bargains.
SEE: Investing In Health Insurance Companies
While the Street may be overvaluing the future cash flow streams from growth med-tech, it also seems to be undervaluing the future cash flow from larger companies like Covidien (NYSE:COV), Medtronic (NYSE:MDT) and Sanofi. While many large med-tech companies are indeed challenged by generic competition, price pressures from hospitals and healthcare systems, and lower procedure volumes, many of these companies are cash-rich and have solid pipelines that should begin delivering growth in the next two to four years.
The Bottom Line
Healthcare stocks continue to outperform this year. The Health Care Select Sector SPDR (ARCA:XLV) is up 10.69% year-to-date, beating the 9.44% return of the S&P 500. The iShares Dow Jones US Pharmaceuticals ETF (ARCA: IHE) is up 14.93%, while the iShares Dow Jones US Medical Devices ETF (ARCA:IHI) is up 5.23%. The SPDR Biotech ETF (ARCA:XBI) has risen 37.77% year-to-date.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.