No industry has been watched as raptly this year as health care, as drug developers raced to deliver us from Covid-19 with new treatments and vaccines. Even so, the sector’s stocks have repeated 2019’s underperformance. Next year should be different, say industry analysts, as it ushers in an administration supportive of the Affordable Care Act and a return to pre-Covid levels of health-care utilization.
Through mid-December, the
S&P 500 Health Care Sector Index
was up 8%, compared with 13% for the
The pandemic affected subgroups differently,
research team wrote in a note last week. Covid testing lifted the diagnostics subsector 31%, while clinical labs rose 18%. Biotech stocks were up 13%, but traditional pharmaceutical stocks and hospitals gained a mere 3%. Retail pharmacies, meanwhile, sank 18%.
As a group, health-care stocks trade at discounted valuations and make up less than 14% of the S&P 500’s market weighting. That seems unlikely to last, says Citi, given that health-care spending is 18% of the economy and growing. “[W]e expect the sector to at least come up to averages,” say the Citi analysts, “implying upside/outperformance for 2021.”
(ticker: AZN) is the top pharma pick of Citi analyst Andrew Baum. Complementing the strong sales of Astra’s cancer drug Tagrisso are the rising sales of its cancer treatments Imfinzi and Calquence. Other building blockbusters include the diabetes treatment Farxiga. Baum thinks the stock could rise by one-third from its recent price of $49.
Citi colleague Mohit Bansal argues that the large-cap biotech
(VRTX) is undervalued. Many investors see the company’s pipeline as bare, but Bansal expects good news in mid-2021 from clinical trials of its investigational treatments for inherited disorders of the liver and kidneys. If Vertex can convert doubters, he thinks its $233 stock could rise 40%.
Their colleague Joel Beatty favors
(SRPT) among midcap biotechs. The company is racing other firms to deliver gene therapies to treat muscular dystrophy, and with Sarepta’s nearly $2 billion in cash, Beatty thinks it has the resources to win.
Sarepta is a name in biotech that’s also favored by the analysts at RBC Capital Markets in a recent note that looks ahead at 2021.
Analyst Brian Abrahams sees at least 8% upside for Sarepta’s $178 stock, if the first quarter of next year provides a good readout from the company’s first randomized, controlled trial of its gene therapy for Duchenne muscular dystrophy. Much rides on this study, but Abrahams is confident in Sarepta’s technology and believes that strong data could convince investors of the $5 billion in annual revenue he foresees for the gene therapy.
The RBC analyst spies 50% upside in the $57 stock of
(GILD). Abrahams is comfortable that the company can protect its HIV franchise with the successful launch of the drug Biktarvy. The earnings boost that Gilead is getting from Covid sales of Veklury (also known as remdesivir) may prove transient, the analyst concedes. But Gilead’s new management should do well with its bets on cancer treatments, including the recently-acquired antibody-drug product Trodelvy.
“If investors return to lower-risk, value-oriented stocks,” says Abrahams, “Gilead should be a beneficiary.”
Write to Bill Alpert at [email protected]