2017: Carnac's Envelope Reads In Health Care

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Includes: CYRX, GILD
by: Leonard Yaffe

Summary

Time to Forecast the Unappreciated Events That Could Shape 2017 in the Medical Area.

2016 Was a Difficult Year For Health Care Stock Performance; 2017 Will Be Much Better.

Many Small Cap Stocks Are Not Priced For Success. Therefore, Favorable Developments Could Lead To Outsized Gains.

Year to date, the IBB and PPH are down 21% and 20%, respectively. The year started out on a weak note, and it was spent separating the "haves" from the "have nots" (with many of the "have nots" becoming "halves"). Below, I list my predictions for 2017; some are readily apparent whereas others are more unique. Not all will come true, but they reflect my current understanding.

1. Health care spending in the US grows at my forecast 2016-2030 annual average of 6%, approximating $3.5 trillion on its way to over $7 trillion in 2030. This should drive favorable US results (dollar strength may be a drag internationally) for medical supply and hospital companies.

2. The ACA, although repealed, is not replaced. Insurance premiums in the exchanges rise less than 12% for the 2018 year, independent of any political actions. It becomes apparent that the extreme increases for the 2017 year represented a "catch-up" by the insurance companies, given the expiration of two of the programs that served to stabilize individual market premiums and to cushion insurers from extreme losses.

3.Similarly, pharmaceutical price increases will be more muted. The drug companies, I believe, had raised prices aggressively over the past two years in part due to the anticipation of a victory by Mrs. Clinton and the expectation of subsequent deleterious legislation. Furthermore, they are cognizant of the adverse publicity and commentary by Mr. Trump. I do not anticipate any legislation that would have a meaningful negative impact on the drug industry.

4.Specialty pharmaceuticals, which represent 1% of US prescriptions but 37% of revenues, will continue to grow above industry trend, but the beginning of the biosimilar wave will have an impact and will become more pronounced in the 2018-2020 timeframe.

5.Merger mania will return to the pharmaceutical sector, and premiums will be attractive. Investor interest will follow. This helps drive an increase in the IBB of 15%.

6.Key clinical trial results for the PCSK9 inhibitors and Merck's Alzheimer drug Verubecestat are positive.

7.Wall Street begins to understand the opportunities for new pharmacotherapies in hepatology (NASH, Hepatitis B and D) and nephrology (non-dialysis dependent CKD anemia, hyperphosphatemia in ESRD) . A host of small capitalization stocks, which are not priced for success, rise significantly, as occurred with Conatus this past week. Stocks include DRRX, ARDX, KERX, ABUS and EIGR.

8.Gilead guides 2017 performance below consensus forecast. The stock goes down under $70, at which time a buyout offer is made.

9.Advances in CAR-T and gene therapies continue. Cryoport (NASDAQ:CYRX), as a cryologistics provider, finally experiences dramatic revenue growth and achieves cash flow break even in the fourth quarter.

Disclosure: I am/we are long ARDX, KERX, ABUS, DRRX, EIGR, MRK, GILD, CNAT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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