Healthy Returns From The Healthcare Sector [Biogen Idec Inc, Celgene Corporation, Gilead Sciences, Inc., Amgen, Inc.]

healthcare1Sy Harding: Healthcare stocks, along with the stocks of food and drink companies are often recommended as defensive holdings for recessions and bear markets, on the premise that no matter what happens people will always have to eat, drink, and take their medicine.

The other side of that thought is that sectors seen as defensive may not be the best holdings in a bull market, when techs, industrials, and speculative stocks of the latest new fad (dotcoms, social networking?) are hot and leading the way.

That may be true for some individual food and drink company stocks. Campbell Soup, Coca Cola, Conagra Foods, Hershey Foods, Kellogg, McDonald’s, Yum Brands, still below their levels of mid-2013, come to mind.

However, the healthcare sector has been much more than a ‘defensive’ holding. It has handily outperformed the S&P 500. That can be seen in the performance of the SPDR Healthcare etf, symbol XLV.

Performance Total Return, Cumulative.

XLV

S&P 500

4 weeks

6.7%

5.4%

13 weeks

13.5%

6.7%

1 year

30.0%

16.4%

3 Years

115.1%

70.1%

5 Years

154.7%

105.2%

15 Years

193.8%

84.6%

XLV is a ‘passive’ (unmanaged) index fund, with a low annual net expense ratio of only 0.16%. Its ten largest holdings are Johnson & Johnson, Pfizer, Merck, Gilead Sciences (NASDAQ:GILD), Amgen, Abbvie, Bristol Myers Squibb, UnitedHealth Group, Biogen (NASDAQ:BIIB), and Celgene (NASDAQ:CELG).

Prior to the passage of the Affordable Care Act (Obamacare), predictions were at both extremes regarding the effect its passage would have on the healthcare sector.

It would be a big negative. It requires pharmaceutical companies to provide higher rebates to Medicare for prescription drugs (estimated at an additional cost to them of $20 billion over ten years), new excise taxes on branded drugs (estimated at $5.3 billion over two years), and a 2.3% tax on the sale of all medical devices (ranging from MRI’s and implants to research equipment).

No, it would be a big positive. More people having health insurance would result in those who previously waited until they were seriously ill and then went to hospital emergency rooms, would be under a doctor’s preventive care, and taking prescription drugs.

However, the healthcare sector had become an innovative and significant growth industry long before the Affordable Care Act became an issue. It was as advanced in pioneering state-of-the art breakthroughs in prescription drugs, vaccines, and medical equipment, as is any other tech-based industry. That did not change under Obamacare.

Nevertheless, with more than 11 million previously uninsured people now insured under the Act, expected to reach 20 million by the end of 2015, it does look like the Affordable Care Act was more of a positive than a negative for the industry.

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