2017 has turned out to be a good year for medical stocks, with strong gains in biopharmaceuticals, medical devices, diagnostics, and HMOs. This can be attributed to a strong overall stock market, a quieting of concerns regarding drug pricing, an unchanged ACA and an underlying 6% growth rate for US healthcare spending. I was favorably inclined toward the sector entering the year, given my target price for the DJIA of 23,000 and my realization that many small and microcap medical stocks had been priced for "non-success". Regarding the latter, the implication was that favorable developments would drive meaningful stock gains.
Entering 2018, the medical stocks appear to be in an "equilibrium phase", meaning that clinical data and legislation will have a significant causative effect on stock moves. I am writing this analysis earlier than usual, as the American Society of Hematology meeting is just over one week away, and presentations at this conference should be reflected in relevant company stock action. Beyond this, I remain very focused on key underlying trends to guide investment strategy. This includes the revolutionary themes of cancer immunotherapy and gene editing, the continued adoption of robotic surgery (and, as I have stated for years, Intuitive Surgical is not only continuing to innovate, but it is well entrenched in both the hospital setting and in the surgeon training programs, thereby making it virtually impossible for the daVinci systems to be superseded for the next 15 years), the technological advances in cancer diagnostics that allow for characterization of the molecular basis of cancer, which in turn can drive drug discovery and the continued progress of RNAi-based therapeutic regimens. From a disease standpoint, in addition to oncology, I expect favorable developments in hepatology, nephrology, allergy, immunology, and CNS (excluding Alzheimer's disease). Furthermore, I forecast US healthcare spending to continue to grow at an average annualized rate of 6% for the next 12 years, at which time it will exceed $7 trillion, or 25% of GDP. This provides for strong underlying support for company performance. In summation, I think 2018 will be a "KISS year", with the idea to keep it simple and concentrate on the big picture themes. Given the aging of the population, and the association between increased age and healthcare resource utilization, this thesis has a long runway.
As for investments, I expect ASH (December 9-12) to be positive for one of my favorite large cap pharmaceutical companies, AbbVie (NYSE:ABBV). Regarding cancer immunotherapy, I would own Novartis (NYSE:NVS) and cryopreservation logistics provider, Cryoport (NASDAQ:CYRX). For gene editing, I believe that the potential for CRISPR/Cas9 justifies purchase of Editas (NASDAQ:EDIT), Intellia (NASDAQ:NTLA), and CRISPR Therapeutics (NASDAQ:CRSP). In robotic surgery, as I have previously highlighted, Intuitive Surgical (NASDAQ:ISRG) is the leader, and it continues to expand its platform to broaden the applicability. In cancer diagnostics, next generation sequencing has advanced the study of genomics and molecular biology. It has improved diagnosis and prognosis, and, importantly, has guided drug discovery. My investments here are Illumina (NASDAQ:ILMN) and Foundation Medicine (NASDAQ:FMI). For RNAi, which appears to be very close to resulting in therapeutics given advances in drug delivery, my choice is Alnylam (NASDAQ:ALNY).
As for specific disease states, I expect favorable developments in hepatology, specifically NASH and Hepatitis B. In this area, I own Arbutus (NASDAQ:ABUS), CymaBay (NASDAQ:CBAY), Madrigal Pharmaceuticals (NASDAQ:MDGL), Conatus (NASDAQ:CNAT), Assembly Biosciences (NASDAQ:ASMB) and DURECT Corporation (NASDAQ:DRRX). In allergy and immunology, I have focused on peanut allergy, atopic dermatitis, and rheumatoid arthritis, and I own Aimmune Therapeutics (NASDAQ:AIMT) and AnaptysBio (NASDAQ:ANAB), in addition to AbbVie. Please note that I have purchased these stocks as I completed my research, and therefore, they have been owned for different time lengths (in other words, they weren't all bought at or near the bottom!).
As for other investable themes, I would mention the shortage of healthcare personnel at a time when the population is aging, the increasing use of basic medical devices paralleling the rise in surgeries, the opioid epidemic and the obesity epidemic.
The outlook for healthcare investing remains bright. Modifications to the Affordable Care Act would likely have only a marginal effect on growth of the industry, given the aging of the population and the prevalence of costly chronic diseases. Pharmaceutical price regulation would have a more significant impact on stocks, depending on its structure. However, it should be noted that drug spending represents only 12% of the total healthcare bill, and the recent growth has been largely confined to the 1% of prescriptions but 37% of the dollar spend, represented by the specialty pharmaceutical category. It bears watching, and I am not forecasting a relevant change in this area. I also note that the smaller capitalization stocks I have listed will largely be driven by clinical trial outcome.
Disclosure: I am/we are long NVS, ABBV, ILMN, FMI, ALNY, ABUS, CBAY, MDGL, ANAB, AIMT, CYRX.
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.