Healthcare Outlook: Sector and Company Predictions for 2013

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In an attempt to gauge the health and direction of the economy, I am breaking down each sector, one by one. In this article, I am looking at healthcare, a sector that has underperformed the market but one with components that have significantly outperformed the market.

Healthcare outlook

Healthcare is a unique sector, because it is the only one that is both secular and cyclical. It’s cyclical because it’s reliant upon regulation, policy, and government spending. However, it is also secular because it consists of companies such as Pfizer, who make medications that must be taken regardless of the economy.

In 2013 the healthcare sector could face a number of headwinds, including a potential reform and continuous debates surrounding Obamacare and changes in premiums for insurers. Therefore, the outlook for healthcare remains a bit uncertain.

As a result of uncertainty surrounding the healthcare sector it is best to invest in those industries of the sector that are secular. Biotechnology companies that are producing the drugs will continue to thrive, as consumers must take their medications, and policy should not reform the more needed medications. However, for insurers and even hospitals, the future is a little less clear, with a high risk/reward ratio.

Top plays for 2013

In choosing a healthcare investment, you want to choose those that are secular and pay good dividends, such as Pfizer, Bristol Myers, and Amgen. However, in this section, my top plays, I am not looking at necessarily the best or safest investments, but rather making a prediction about the companies that I believe are presenting the greatest upside.

My first call is the one that I feel is the biggest slam dunk, which is a bullish long call on Arena Pharmaceuticals (NASDAQ: ARNA). Everyone knows that Vivus has now seen a boost in sales, but that sales have been slow. However, I don’t think Arena runs into the same problems. The company will have more flexibility to market its product; it will have more flexible insurance coverage; it can be purchased at local pharmacies; it has global potential; the company has a partner; and finally it doesn’t have the safety concerns associated with Vivus’ product. Overall, I think Arena is priced attractively and that its launch will be a massive success, therefore pushing its shares higher in 2013.

There is something special about companies that produce orphan drugs, such as Alexion Pharmaceuticals and BioMarin. The market tends to reward these companies with massive valuations. For this reason I am predicting that shares of Sarepta Therapeutics (NASDAQ: SRPT) will more than double in 2013. The company’s muscular dystrophy drug is all but a sure thing with sales potential of $700 million. Therefore, with a $60 price, and a price/peak sales of 2.18, Sarepta would actually be undervalued compared to other orphan companies such as Alexion. Therefore, I expect large gains as investors and funds snatch up this biotech company.

Last year I chose Spectrum Pharmaceuticals (NASDAQ: SPPI) and I was wrong -- however I was right the three years before. And for 2013, I am bullish once more because I think the fears regarding generic Fusilev will prove to be irrelevant. I also think 2013 will be the first year that Zevalin will show progress from the bioscan lift and that the Allos acquisition will prove to have great synergy with the company’s other two approved products. Furthermore, I don’t think a 7.50 P/E ratio is sustainable for a company that continues to grow year-after-year.

Finally, my last play for 2013 is Amarin Corporation (NASDAQ: AMRN). For the last two years, I have gone back-and-fourth with my outlook for this company. But everytime it hits $8 I buy, and it has always worked out. This is a company that now has an approved product, is preparing for launch, and will most likely reach sales of $300-$500 million in its first year. Therefore, with a market cap of $1.15 billion I see no reason that Amarin could not double, maybe more in 2013, with a price/sales between four and seven.

Conclusion

Regardless of how you plan to play healthcare stocks in 2013 you can rest assure that the sector will produce market leading companies. It seems that every year the healthcare space consists of the best performers in the market, and because of value that is being presented, I think it is very possible in 2013. However, there are a number of uncertainties in the space, but like all sectors, there is always value somewhere, you just have to find it. 


BrianNichols is long SPPI, AMRN, ARNA, SRPT. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure