The stock market’s changing landscape has been conducive to growth for certain industries, while other industries lose earning strength during the same time period. In the past few years, health care stocks have performed well, and quite a few IPOs have emerged from the industry. As of 2016, health care may be heading toward trouble due to a number of factors.
It is out of the ordinary that in January 2016 there will likely be zero, or very few, IPOs. New IPOs have been few in other industries as well due to uncertainty about U.S. economic policy, poor performance in previous IPOs and fear of falling U.S. markets. Few health care IPOs are set for 2016, though investors should be aware of the upcoming IPOs of Reata Pharmaceuticals and Tabula Rasa Healthcare Inc. Contributing to the fall in new public offerings for 2016 is Obamacare paired with losses in previous health care IPOs.
Health Care Affected by Obamacare
By fourth-quarter 2015, the health-uninsured rate in the United States was 11.9%, an increase from first-quarter 2015. The drop in the number of individuals with health insurance shortly after the debut of Obamacare suggests the health care initiative temporarily, but not permanently, altered the insured rate. Health care companies were boosted in the short run from a higher patient turnout, and in 2014, health care spending hit 17.5% of GDP. With the uninsured rate increasing and fewer health care IPOs on the way in 2016, health care spending in the United States may have reached its peak. The sector’s growth in 2016 will likely reflect U.S. economic growth.
Obamacare has altered the way the health care industry does business as it imposes mandatory health insurance coverage on Americans, with a fine levied against those who do not have some form of coverage. This had the effect of temporarily boosting the health care industry because newly covered individuals went to see doctors, had diagnostic tests performed and readily filled prescriptions.
This time was short-lived as Americans were soon hit with health care bills they realized they could not afford or preferred not to have incurred in the first place. This practicality issue has more than likely contributed to the recent spike in the uninsured rate, and is bad news for health care and forthcoming IPOs.
2016 Health Care IPOs
While 2013 and 2014 were strong years for new IPOs in many industries, 2015 experienced a significant drop in IPOs, and 2016 will also likely be a year of few IPOs. About half of 2015’s health care IPOs experienced losses by the start of 2016, indicating health care may not be as stable an industry as previously thought. Several IPOs are planned in the health care sector for 2016, including cancer treatment developer Syndax Pharmaceuticals, gene therapy developer Audentes Therapeutics, experimental drug developer Reata Pharmaceuticals and medication-management technology provider Tabula Rasa Healthcare.
In 2015, about 45% of IPOs were in health care, but 2016’s earning potential for health care companies may have slowed. In the same year, six major diagnostic company IPOs drove losses of 58%. Poor stock performance in 2015 overall will have the effect of discouraging IPOs in 2016. The U.S. economy can support a limited amount of expansion in the health care industry despite the industry having received the most investment dollars from IPOs in the past year. The poor performance of the sector may indicate investor expectations were not in line with potential earnings and demand. Overall, health care has been harmed by an overestimation of demand, and this is why fewer health care IPOs are likely to emerge in 2016. Due to an oversaturated market, investors should consider health care IPOs for a long-term horizon in companies catering to the needs of underserved markets.