By Sarah Toy
These are the trends that will shape how the market reacts to earnings
Health companies will begin reporting second-quarter earnings next week, starting with two Dow components, Johnson & Johnson and UnitedHealth Group Inc.
It has been a tumultuous few months for managed-care companies, pharmaceutical companies and biotechs. Fears around "Medicare for all" () weighed on earnings last quarter. UnitedHealth (UNH) , facing investor anxiety about the implementation a single-payer system, saw its shares drop sharply in April ( ) even after the company beat Wall Street expectations and boosted full-year guidance. Shares of other insurers and managed-care companies also fell at the time ( ), and biopharma stocks followed suit ( ).
Some of those fears have since dissipated and health stocks have mostly recovered to their pre-April levels. But there's still some unease about where the health regulatory landscape is headed, and pharmaceutical companies are still facing questions about their long-term growth potential.
Here are three big things on investors' minds as earnings season kicks off this time around.
Potential changes in health policy
Although it seems that the worst is over for health stocks, the fate of the Affordable Care Act remains uncertain, with 20 state attorneys challenging the law's constitutionality without its penalty on patients without coverage.
Change could also be coming for drug pricing. The Trump administration has vowed it will drive down drug costs, but how and when is still up in the air. The administration has made several proposals -- requiring drugmakers to disclose drug prices in television ads, overhauling the current rebates system and mulling an executive order allowing the U.S. to buy drugs based on the lowest price paid by other countries -- but investors aren't sure which, if any, of those will stick. The administration said on Thursday it would be withdrawing its plan to overhaul the rebates that drugmakers give to middlemen in Medicare (), and a federal judge on Monday blocked the plan to require pharmaceutical companies to disclose drug prices in TV ads.
"In the near term... we expect the focus on drug pricing reform (congressional action and/or potential presidential executive orders) will likely dictate sentiment and complicate setups into the print themselves. As such, we expect the sector will be volatile over the next couple of weeks," UBS analyst Carter Gould wrote in a Thursday note on second-quarter biotech earnings to clients.
Read: This would be the worst-case scenario for health stocks, according to UBS ()
Patent expirations and generic competition
Many big biopharma companies rely on just one or two drugs for a big chunk of their revenue. Now they're facing the twin demons of patent expiration and generic competition. This was a big theme last earnings season and is expected to loom large over second-quarter earnings as well.
A prime example: AbbVie Inc.'s (ABBV) top-selling drug Humira, which brought in 61% of the company's revenue in 2018, is facing increasing competition in Europe. The drugmaker warned investors that 2019 sales would drop after competitors like Mylan NV (MYL) and Amgen Inc. (AMGN) began selling lower-cost biosimilars of the drug in Europe in October.
Sales of AbbVie's Humira fell 5.6% last quarter, but management assured investors () that the company's pipeline would more than plug up any holes that biosimilar competition to Humira might leave. AbbVie has said the competition will likely reduce overall Humira sales by $2 billion this year.
Investors did not expect that AbbVie would expand its portfolio by acquiring troubled pharmaceutical giant Allergan Plc () . The deal, announced in late June and worth about $63 billion, adds several big-name cosmetic treatments, like anti-wrinkle injectable Botox and dermal filler Juvéderm, to the AbbVie line-up.
The acquisition came shortly after Pfizer Inc. (PFE) agreed to buy cancer-therapy biotech Array BioPharma Inc () for $10.64 billion in cash. Earlier that month, Merck & Co. Inc. (MRK) bought Tilos Therapeutics Inc ( ). for $773 million, and in May, Merck agreed to acquire Peloton Therapeutics Inc ( ). for around $1.1 billion. In January, Bristol-Myers Squibb Co. (BMY) kicked off the new year by announcing it would acquire Celgene Corp ( ) for an estimated $74 billion.
This wave of megamergers comes as large biopharmaceutical companies look for ways to generate growth. And investors should expect more of these; last month, Moody's said M&A activity is set to rise () and named Amgen Inc. (AMGN) , Biogen Inc. (BIIB) , Gilead Sciences Inc. (GILD) and Novo Nordisk A/S (NOVO-B.KO) as likely acquirers. ( )
Read: J&J earnings preview: Wall Street is still optimistic despite company's legal issues ()
Also: UnitedHealth stock has bounced back after a rough first quarter. Will its positive streak continue? ()
-Sarah Toy; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
July 15, 2019 06:58 ET (10:58 GMT)
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