S&P recommends marketweighting the S&P 500 Health Care sector. Year to date through November 18, the S&P Health Care Index, which represented 11.6% of the S&P 500 Index, was up 4.0%, compared to a 3.3% drop for the S&P 500. In 2010, this sector index rose 0.7%, versus a 12.8% advance for the 500. There are 10 sub-industry indices in this sector, with Pharmaceuticals being the largest, at 51.7% of the sector’s market value.
S&P equity analysts have a neutral fundamental outlook on the key Pharmaceuticals sub-industry. We think this sub-industry faces challenging prospects in 2012, given an impending “patent cliff” beginning this year, austerity pricing in Europe, increasing generic drug penetration, and what we consider unimpressive new drug pipelines. On a positive note, emerging market sales are expected to continue to grow briskly in 2012. Also, increasing biotech M&A, low HMO utilization rates, attractive pharmaceutical sub-industry dividends and more efficient R&D spending offset the aforementioned negatives, in our view. According to Capital IQ, the sector’s P/E multiple of 10.7X consensus estimated EPS for 2012 is below the broader market’s P/E multiple of 11.3X. Its P/E-to-projected-five-year EPS growth rate (PEG) ratio of 1.3X is above the market’s PEG ratio of 1.0. This sector’s marketweighted S&P STARS average of 3.9 (out of 5.0) is slightly above the S&P 500’s 3.8.
The S&P GICS Health Care Index has broken out from a bullish, double-bottom reversal pattern, turning the intermediate-term trend to bullish, in our view. The sector also broke above a bearish trendline off the highs since July, confirming to us the trend change. Prices have popped back above both the 17-week and 43-week exponential moving averages, and the shorter average is back above the longer average, also bullish signs, in our opinion. Prices now face a small region of overhead supply between 400 and 420. Relative strength versus the S&P 500 was in an uptrend from February until the end of September, but that uptrend has broken to the downside. We have lowered our technical opinion on Health Care to neutral with a bearish bias, from neutral.
We recommend marketweighting the sector as we think an attractive valuation already reflects widely appreciated weak pharmaceutical drug pipelines and is therefore fostering more competitive performance as investors focus on newer positive catalysts and the sector’s defensive properties.
While patent expirations are hurting AZN’s growth profile, the company is making strides to launch new products, and currently approved drugs are still posting steady growth. We believe Astra’s most important new drug launches are diabetes drug Onglyza and cardiovascular drug Brilinta, which are showing respectable launches; we believe both drugs will eventually develop into blockbusters. Also, in-line products are generating steady growth, with the company’s leading drug Crestor up 14% operationally from the prior-year period. Despite mixed results against Lipitor, we believe Crestor sales will hold up well against low-cost generic versions of Lipitor expected by the end of the year.
Sanofi-Aventis’ (SNY) wide lineup of branded drugs and vaccines and a robust pipeline create strong cash flows and a wide economic moat. Growth of existing products and new product launches should help offset patent losses for cancer treatments Eloxatin and Taxotere as well as anticlotting agent Plavix. Sanofi has compiled a robust group of late-stage pipeline products that complement its existing lineup and should help mitigate patent losses. We expect continued strength in the oncology class with potential blockbuster Zaltrap emerging from the late-stage pipeline. Also, diabetes drug Lyxumia looks to be a strong complement to the company’s well-entrenched diabetes franchise.
The table below shows the list of health care stocks making the high yield dividend stocks with bullish equity scores.
