Health Care Stocks Still Healthy Despite Higher Hedging Costs

NEW YORK (TheStreet) -- Analysts predict earnings will soar by 11% for health care companies, higher than the 7.2% increase by the Standard & Poor's 500 Index and faster than the average for the whole sector, Bloomberg reported. The forecast came after first-quarter earnings of major health care stocks surpassed analysts' expectations.

The S&P Health Care Index has risen by 4.8% for the year to date, and 23.9% over the past calendar year.

Hedging costs rose to an eight-year high despite merger announcements from the biggest health care stocks in the wake of the biotech sell-off late in March, Bloomberg reported. Implied volatility has peaked its highest in eight years, propelled by gains from M&As from Pfizer (PFE), Allergan (AGN), Forest Laboratories (FRX) and Eli Lilly (LLY).

Stocks have skyrocketed by as much as 84% since 2011 due to the $285 billion proposed mergers and acquisitions, Bloomberg reported. The article noted investors were keen on hedging because of the recent health care stocks rally and to avoid a possible downdraft from  biotech, which suffered during the selloff.

The Nasdaq biotech index dipped by 20% late in March after peaking in February. Many analysts referred to the downdraft as a "bubble burst," while some analysts argue that a bubble is far from happening.

The S&P 500 Health Care Index has outpaced the S&P 500 by 32% in two years, with gains reaching a whopping 55%, according to the Wall Street Journal. The reason the sector grew this much was the $21.5 billion investors funneled into health care-focused mutual funds and exchange-traded funds since early last year.

Despite the recent slowdown, many health care stocks continue to provide investors protection.

Health care stocks seem to have the same key growth areas as the younger, smaller biotechs.

For instance, Johnson & Johnson's (JNJ) hepatitis C, immunology and oncology pipeline has boosted J&J's earnings, Forbes.com reported. Sales for its immunology drugs Simponi and Stelara rose by 9.3% and 31.8% to $715 million this year. The company's new Hep C drug, Olysio, also eclipsed expectations, with sales reaching $354 million. Sales for J&J's cancer drugs Velcade and Zytiga edged up by 15.8% (to $408 million) and 48.8% (to $512 million), respectively.

TheStreet's biotech columnist Adam Feuerstein said it puzzles him why Pfizer, which recently announced plans to buy AstraZeneca (AZN), is not bidding on biotech companies like Gilead (GILD), Biogen Idec (BIIB) and Celgene (CELG).

He also cited Novartis (NVS), which is purchasing GlaxoSmithKline's (GSK) cancer therapeutics for $16 billion and selling its vaccine portfolio to Glaxo for $7 billion; and Valeant Pharmaceuticals (VRX), which proposed a $50 billion takeover bid to Allergan, as other examples of Big Pharmas not buying into biotech. At the Allicense 2014 health care conference, Feuerstein said Bristol-Myers Squibb (BMY) VP for Business Development Graham Brazier told him the "current market caps" and "necessary takeover premiums" make biotechs a no-buy for Big Pharmas.

Biotech and health care share the same market scope. Gilead, which is currently the biggest and top-earning biotech stock, has a strong foothold in the Hep C arena with its drug Sovaldi, as does J&J with its new drug Olysio. 

Meanwhile, several small-caps and micro-caps show promise.

BioCorRx (BICX), for example, is a small, over-the-counter micro-cap that has successfully tapped into the $23 billion addiction treatment industry with its revolutionary Naltrexone time-release implant. The Naltrexone implant curbs alcohol and opioid cravings in patients and is seen by many in the industry as a game-changer in alcohol and opioid rehabilitation.

Diagnostic product developer Volition Rx (VNRX), which has clinical trials for its neuclosomes-based diagnostic technology, and Omni Bio Pharmaceutical (OMBP), which offers a plasma-derived alpha-1-antitrypsin (AAT) drug that is effective in treating emphysema, also appear to be promising micro-cap biotechs, as Life Sciences Report had noted.

Biotech's role in medical treatment cannot be ignored. As the aging population and Affordable Care Act continue to increase demand for health care services, biotech companies will even play a larger role in the grand scheme of things.

The question is, will health care stocks take notice and start buying them?

>>Read More: Celgene Deal Chief Calls Big Pharma Gutless For Lack of Biotech M&A

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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