Health care is considered one of the market’s four defensive pillars—along with utilities, telecoms, and consumer stocks.
It’s not easy to separate the companies that generate growth through price increases from those selling more products. Most pharmaceutical, biotech, and specialty pharma outfits disclose only the dollar amount, not the volume, of drugs sold. However, IMS Health releases weekly prescription data. Goldman Sachs’ Rubin crunched those numbers. Among the companies she identified as among the worst offenders over the past five years were Horizon Pharma (HZNP), where price boosts produced 63% of sales growth above the rate of inflation, Jazz Pharmaceuticals(JAZZ), where they accounted for 58% of sales gains, and Concordia International(CXRX), where they generated 51% of growth.
YET KNOWING which companies profited from jacking up prices isn’t enough to separate the winners from losers. Already, Horizon and Jazz have started shifting from business plans focused on higher prices to ones that rely on new products. Jazz, for instance, could get 36% of its revenue through 2020 from new drugs, including Defitelio, which treats blockages of blood vessels in the liver, and JZP-110, a narcolepsy treatment. Similarly, Horizon could get 45% of its growth from orphan drugs targeting rare illnesses. Goldman has Buy ratings on both stocks and believes they could gain more than 50% over the next 12 months. “The ability of biopharma companies to adapt to a more restrained pricing environment will differentiate winners and losers,” the analyst says.
