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Why health stocks are doing so well

Dan Gorenstein Apr 20, 2015
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It’s a great time to own health stocks. In fact, over the past five years, the sector has outperformed most other industries.

What’s driving the surge? Wunderlich Securities analyst Art Hogan says it’s easy as saying “ACA.”

“Whether you are running a hospital, a doctor practice, a pharmaceutical company, there is more access to your product,” he says of the Affordable Care Act. Thanks to Obamacare, more than 11 million people are newly insured, which means a raft of new customers.

“Therefore, profitability in the healthcare sector is going to go with that,” says Hogan.

The health care law is just one source of success. Biotech firms are on fire, with saying those companies are up 18 percent this year, more than doubling the total sector. Bloomberg Intelligence Healthcare analyst Asthika Goonewardene says firms are developing innovative products.

“We are going through a phase where the science is very, very good. I don’t want to say you are guaranteed clinical success, but your chance of clinical success are really high,” he says.

Goonewardene points to Gilead’s highly effective hepatitis C treatment Sovaldi, which has generated more than $10 billion in revenue. A drug that helps patients, no doubt, but at $1,000 a pill, it’s expensive. It’s an issue that dogs big biotech blockbuster drugs.

“The question that comes to mind is, ‘Okay, you are having all these great drugs come out. Who is going to pay for them?’”

That’s the big risk with these hot biotech firms. As a rule, Goonewardene says pricing questions send stock prices fluttering. And as companies likely deliver more powerful drugs, these questions will only intensify.

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