|By STEVE ROTHWELL, AP Business Writer|
The industry group that includes health care providers, drugmakers and biotechnology companies has advanced 7.3 percent this year, making it the second-best in the Standard and Poor's 500 index, trailing only energy companies. Even drugmakers, traditionally considered a safe-haven play, are outperforming the market.
The rally has solid foundations, but not all companies will benefit equally from the influx of cash. Also, the wide range of stocks in the sector offer investors vastly differing risk and return dynamics.
U.S. health care spending is projected to climb at a faster pace than economic growth in coming years as the population ages and President
"There's just a lot more money flowing into health care and we're seeing the markets react accordingly," says
The biggest beneficiaries of the act will likely be hospital companies, which have the potential to increase their earnings significantly, says Taner, who manages
So-called managed-care companies should also benefit from the increase in spending, though they also face higher taxes and restrictions on how they can price their coverage, so the law will be challenging to them too.
Drugmakers, often regarded as defensive growth companies by analysts, are also emerging from the doldrums after lagging the broader index for much of the last decade.
The big pharmaceutical companies were shunned by investors as they faced challenges from rising research costs and the economic slump in
Drug companies were also hurt by what the industry dubbed the "patent cliff," as an unprecedented number of patents expired on drugs worth billions of dollars in sales. The expiration of patents allows cheaper generic versions of drugs to replace blockbuster products. That hurts sales.
Pfizer lost exclusivity for its cholesterol-fighting drug Lipitor in the U.S. in
The worst of the impact of patent expiration may now be over for the drugmakers, and the market has already factored it into stock prices, says
"The `patent cliff' for most of the companies has now come and gone," says Bussard, who is a physician by training. "Some of the largest losses to generic competition are in the rear-view mirror now."
Approvals for first-of-a-kind drugs have also been climbing as drugmakers continue to pursue an emerging business model focused on treatments for rare and hard-to-treat diseases.
In addition to being relatively low-risk investments, due to the steady demand for drugs, Big Pharma also pays big dividends.
The largest drug companies in the
Biotechnology companies are possibly the most exciting companies in the sector and are also advancing.
Investing in this sector can be challenging, though, as the vast majority of drugs being developed don't work out.
"It's probably unwise ... to try to pick the individual winner," says
While the Affordable Care Act ensures that money will flow into the industry in the near term, that spending can't keep rising exponentially. At some point, the focus will turn to the cost of the reforms, particularly if the initial spending estimates are exceeded, causing renewed uncertainty for the industry.
"That's a longer-term concern that is going to come into play at some point," says
And if history is a guide, the cost estimates will likely prove too low.
Upon passing the
To counter the rising costs, governments and employers will increasingly try to shift more of the cost to individual consumers, transforming the industry from an "employer-driven insurance market" to an "employee-driven consumer market," says
"The companies that are the most innovative in helping drive costs down are going to be the growth companies of tomorrow," says Yoon, who manages the investment firm's Select Health Care Portfolio.
AP Business Writers
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