Despite uncertainties in other sections of the US healthcare industry, those in the business of life science tools and services are riding high.
Life sciences companies that specialise in providing laboratory instruments to pharmaceutical companies, academia and industrial labs are seeing robust stock performance. The S&P 500 Life Sciences Tools & Services Index, specific to this subsector, climbed 27% this year. This stands out from a relatively modest 9% rise for the broader S&P 500 healthcare sector.
Strong first-quarter results set the stage for a rise in share prices; however the biggest impact came in early May, when Congress passed a bill which included $2 billion in additional funding for the National Institutes of Health (NIH), which funds medical research in the US. “The boost to the NIH budget is definitely a tailwind”, said Jeff Jonas, a portfolio manager with financial services firm Gabelli Funds. The NIH accounts for about 24% of all academic-related spending in the life science tools sector, according to Cantor Fitzgerald analyst Bryan Brokmeier.
Unlike the broader healthcare sector, tools and services companies are less vulnerable to political wrangling in Washington. “They’re not really part of the healthcare reform debate. They’re not part of the drug-pricing debate, so they really have minimal headline risk”, said Teresa McRoberts, portfolio manager at Fred Alger Management. “People are looking for alternatives to pharma and alternatives to biotech, and so I think these stocks are getting bid up as alternatives to those. Plus, their fundamentals have been fine.”
About 65% of these companies’ business comes from life sciences markets, reckons Paul Knight, an analyst with Janney Montgomery Scott, though this varies by company. At the same time, their success hinges on a degree of weakness in other segments of the life sciences sector. As Reuters reports, the shares continuing to outperform “could rest not only on the companies' ability to grow at healthy rates, but also on if other healthcare industries become more appealing and lure away investors.” As Knight pointed out, “Sector rotation is a continuing risk for the life science tool sector.”
Companies in the S&P 500 Life Sciences Tools & Services Index include Waters Corp, Thermo Fisher Scientific Inc, Mettler-Toledo International Inc, Agilent Technologies Inc and Illumina Inc. On average they reported revenue growth of 5% in the first quarter, up from last year’s rate of 3% to 4%. “I think you have to maintain or exceed that growth rate in the rest of the year” for the stocks to continue their strong performance, said Knight.