Healthcare stocks are trailing the broader market since the start of the pandemic, but Wall Street analysts see hope for stock pickers looking for opportunity among the industry’s worst-performing large-cap names.
The S&P 500 healthcare sector index (.HCX) is up 26.6% since the start of 2020, well shy of the 40.2% gain seen by the S&P 500 (.SPX). This year, the healthcare index is up 13.2%, compared with the 20.1% increase in the broader index.
There have been some winners this year among the healthcare stocks in the S&P 500, most outstandingly Moderna (MRNA), up roughly 220%. The hospital owner HCA Healthcare (HCA) is up 52.1% this year, while Eli Lilly (LLY) has gained 43.1%.
Those price jumps have been more than matched, though, by the sector’s losers. The generic drugmaker Viatris (VTRS) is down 27.8% this year, while the biopharma firm Incyte (INCY) has fallen 25.1%, and the biotech Vertex Pharmaceuticals (VRTX) has lost 22.2%.
It is among the companies whose stocks have fallen the most this year that analysts see the biggest opportunities for gains in the healthcare sector.
Barron’s ran a screen of the healthcare stocks in the S&P 500 to find the four that trade the furthest below their average target prices, set by Wall Street analysts to indicate where they expect a stock to trade after a given period, usually 12 months.
The screen yielded the three healthcare stocks in the S&P 500 that have fallen the most this year— Incyte , Vertex, and Viatris —plus the biotech firm Biogen (BIIB).
We ran a similar screen, seeking five stocks, back in June. At the time, Incyte and Vertex both made the list. Of the other stocks that passed, two have since outperformed the S&P 500 healthcare sector index. Organon (OGN) is up 9.9% since then, and Hologic (HOLX) has risen 13.5%. The sector index has rallied 3.4%, compared with 6.3% for the S&P 500.
Cigna (CI), which also passed the screen in June, has fallen 13.6% since then.
This time, the stock in the S&P 500 trading the furthest below its average analyst target price is Incyte. The stock has stumbled, beset by a number of investor worries. Increasing Food and Drug Administration concern over the safety of a class of drugs known as JAK inhibitors has dampened hopes for Incyte’s contenders in that group, including Jakafi and Opzelura.
When the FDA approved Opzelura to treat atopic dermatitis in late September, it required that the company include warnings on the drug’s label, noting a risk of serious infections. Shares of Incyte fell 8.5% on the day of the approval.
Despite the worries, however, many analysts remain enthusiastic about Incyte. Of the 20 who cover Incyte tracked by FactSet, 12 rate it a Buy while eight rate it a Hold. Analysts’ average target price on the stock is $97.87, implying a 50.1% gain over its recent price of $65.22.
“INCY has a deep and promising pipeline,” wrote Oppenheimer analyst Jay Olson in early October. “INCY’s diverse pipeline should drive accelerating revenue growth, which is currently undervalued, in our view.”
Next to pass our screen is Biogen , the biotech behind the most controversial drug launch of the year. Biogen shares are up 9.5% this year, but down 22.3% since the start of July. The stock soared 38.3% on a single day in early June, when the FDA handed down a surprise approval of Aduhelm, the company’s Alzheimer’s disease therapy.
Investor enthusiasm for Aduhelm has faded amid a tidal wave of bad news. Experts on the FDA advisory committee that had voted overwhelmingly against approving the therapy resigned following the approval, saying that the evidence didn’t support its efficacy.
Since then, the Centers for Medicare and Medicaid Services has launched a process to decide whether Medicare will cover the drug, the inspector general of the Department of Health and Human Services has begun an investigation into the Aduhelm approval, some private insurers have said they won’t cover it, and some healthcare systems in the U.S. have said they won’t administer it.
The rollout is going far worse than expected. The company reported on Wednesday that it had only sold $300,000 worth of the drug in the third quarter, far short of the $12.1 million anticipated by Wall Street analysts, according to FactSet.
In a note early Wednesday, Piper Sandler analyst Christopher Raymond wrote that the Aduhelm launch was “even worse than we feared.”
Still, despite investors’ pullback on the stock and some analysts’ worries, 16 of the 31 analysts who cover Biogen tracked by FactSet rate the stock Buy or Overweight, while 15 rate it at Hold. While the share price has plummeted in recent months, analysts’ recent average price target is $397.80, only slightly lower than the late June figure of $417, according to FactSet. That target implies a 48.5% gain over the stock’s recent price of $267.95.
Analysts say that Biogen’s future depends in no small part on Aduhelm, and many have confidence that it will eventually turn into the megablockbuster that Biogen hopes it will. “While its initial launch is disappointing, based on the comments of our consultants we remain hopeful that Aduhelm will eventually achieve sales sufficient to return BIIB to growth,” Cowen analyst Phil Nadeau wrote in an Oct. 15 note.
Another stock that passed the screen, Vertex, down 22.2% this year, was once a darling of healthcare investors for its cystic fibrosis franchise. Worry over the company’s pipeline, however, has sent the stock into a year-long slide. Shares are down 36.1% since July of 2020, a period in which the S&P 500 is up 48.7%. The stock is now trading close to its 52-week low of $176.36.
The company has seen two failures of drugs meant to treat alpha-1 antitrypsin deficiency, a lung and liver disorder, first in October of last year and then again this June.
The company’s core cystic fibrosis franchise remains strong, however, and analysts haven’t lost faith. Earlier this week, Vertex announced positive data on the first patient treated in a Phase 1/2 trial of a new stem cell-derived therapy to treat Type 1 diabetes. Of the 27 tracked by FactSet who cover the stock, 20 rate it a Buy or Overweight, while five rate it a Hold and two rate it a Sell.
Their average target price of $260.52 suggests a 41.9% gain from the stock’s recent price of $183.62.
“We continue to think the stock is not currently pricing-in any credit to the pipeline, and credit is currently being given only to the base business,” Cantor Fitzgerald analyst Alethia Young wrote in a note out Oct. 14.
The last stock to pass our screen was Viatris, formed last year through a merger of the generic drugmaker Mylan and a Pfizer (PFE) division that sold off-patent drugs in overseas markets. Viatris shares are down 27.8% this year.
Viatris is more thinly covered than some of the other stocks on our list, with 16 analysts tracked by FactSet maintaining ratings on the stock. Of those, seven rate it Overweight or a Buy, while nine rate it a Hold. Their average target price is $18.85, implying a 38.9% gain over the stock’s recent price of $13.57.
Many of those target prices have not been recently updated, however, and were made when the stock was trading higher. That suggests that the average target price may be overstating analysts’ enthusiasm.
Still, some analysts do like Viatris. “In our view, ’21 execution, sound long-term guidance, a cogent/clearly communicated dividend policy and value creating business development strategy are key to overcoming VTRS’ historical discount to the peer group,” wrote Bank of America analyst Jason Gerberry in a note out Oct. 12.
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