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Health care stocks get a boost in S&P 500

Analysts expect hospitals, managed-care companies to benefit from health care legislation.
By STEVE ROTHWELL Published: January 26, 2013

Pfizer lost exclusivity for its cholesterol-fighting drug Lipitor in the U.S. in November 2011. In its most recent earnings report, Pfizer said that U.S. revenues from the drug plunged 87 percent in the third quarter of 2012 to $192 million. The company will release its fourth-quarter earnings Tuesday.

The worst of the impact of patent expiration may now be over for the drugmakers, said Mark Bussard, a health care analyst at fund manager T. Rowe Price.

“The ‘patent cliff' for most of the companies has now come and gone,” said Bussard, who is a physician by training. “Some of the largest losses to generic competition are in the rearview mirror now.”

Approvals for first-of-a-kind drugs have also been climbing as drugmakers continue to pursue an emerging business model focused on treatments for rare and hard-to-treat diseases.

The Food and Drug Administration approved 39 new drugs last year, up from 30 the year before and the highest annual tally since 1997, when the agency also approved 39 drugs.

In addition to being relatively low-risk investments, due to the steady demand for drugs, Big Pharma also pays big dividends.

The largest drug companies in the S&P 500 have higher dividend yields than the broader index, which yields 2.1 percent. Pfizer currently has a 3.6 percent yield and Merck & Co. yields 4 percent.

Biotechnology companies are possibly the most exciting companies in the sector and are also advancing.

Investing in this sector can be challenging, though, as the vast majority of drugs being developed don't work out.

“It's probably unwise … to try to pick the individual winner,” said Sam Isaly, the manager of Eaton Vance's Worldwide Health Sciences Fund.

While the Affordable Care Act ensures that money will flow into the industry in the near term, that spending can't keep rising exponentially. At some point, the focus will turn to the cost of the reforms.

“That's a longer-term concern that is going to come into play at some point,” said Invesco's Taner.