This past year has been a great one for healthcare investors -- the S&P healthcare index ETF offered double the return of the S&P 500. Biotechnology stocks dominated the list of the 10 top-performing large-cap healthcare stocks this year. But acquisitions add some spice to the list, and an insurer and a medtech stock made the cut, too. Let's take a quick look at this year's 10 top-performing healthcare stocks, and determine why they charged higher in 2014.
10. Regeneron (NASDAQ:REGN) rewarded investors with a 57% return through Dec. 9, as investor excitement about its bad-cholesterol-busting drug alirocumab picked up steam. Analysts think that alirocumab could have billion-dollar blockbuster potential based on the fact that statins remain some of the world's most prescribed medicine. If the FDA eventually approves alirocumab, and analysts are correct, then Regeneron could find itself with two top-selling drugs. The company's Eylea, which is used to treat vision loss in patients with certain eye conditions, had sales of $722 million last quarter alone.
9. Vertex Pharmaceuticals (NASDAQ:VRTX) was once a top stock for its now shuttered hepatitis C drug Incivek, but it's the company's cystic fibrosis drug Kalydeco that helped lift shares by more than 60% in 2014. In the third quarter, sales of Kalydeco totaled $127 million; but investors are most optimistic about future label expansion, which could increase the number of addressable patients that could benefit from taking Kalydeco from 2,600 to 4,000 people or more.
8. Alnylam Pharmaceuticals (NASDAQ:ALNY) had its fair share of pops and drops this year; but in the end, investors have come out on top as shares have climbed 65% so far this year. Investor optimism stems from the company's RNAi technology, which Alnylam is using to develop drugs that it hopes will be safer and work better than existing therapies. Alnylam is currently conducting clinical studies on a treatment for TTR amyloidosis, hemophilia, and hypercholesterolemia. In January, Sanofi (NASDAQ:SNY) showed its support for Alnylam's technology by buying 12% of the company at a price of $80 per share.
7. Centene Corp. (NYSE:CNC) is the only insurer among the large-cap best performers this year. The company's Medicaid-centric focus is the main reason for its run-up. Thanks to 25 states embracing Medicaid expansion ahead of 2014, Centene's sales climbed 56% year over year in the third quarter, leading the company to boost its full year 2014 EPS guidance from at least $3.70 to at least $4.35.
6. Illumina Corp.'s (NASDAQ:ILMN) nearly 70% return this year stems from growing sales of its gene sequencing machines. Researchers are increasingly turning to Illumina's machines to understand how gene's work, and develop gene-targeting medicines. As a result, Illumina's sales jumped to $1.35 billion through the first nine months of this year, up from $1.03 billion last year.
5. Medivation Inc. (NASDAQ:MDVN) and its partner Astellas market Xtandi, one of the best-selling medicines for the treatment of prostate cancer. The company's Xtandi is widely prescribed as a post-chemotherapy treatment for prostate cancer patients, and analysts think that the recent approval for Xtandi's use in pre-chemotherapy patients could turn it into a billion dollar a year blockbuster next year. Those projections helped Medivation shares climb by more than 70% this year.
4. Mallinckrodt (NYSE:MNK) is the pharmaceuticals business that was spun off by Covidien in 2013. Mallinckrodt, which has gained 85% this year, markets a slate of opioids for the treatment of pain. But it made a big splash earlier this year when it acquired specialty drug company Questcor to get its hands on the top-selling drug Acthar. Thanks to strong demand for the company's next-generation opioids and its Questcor acquisition, Mallinckrodt's Q3 revenue and earnings jumped 44.8% and 71.4%, respectively, last quarter.
3. Allergan (UNKNOWN:AGN.DL) was the third-best-performing big-cap healthcare stock this year, returning more than 90% thanks to its being acquired by Actavis last month for $66 billion. Following activist Bill Ackman taking a 10% stake in the company in April, Allergan, which markets the blockbuster drug Botox, was a hotbed of M&A chatter. In the end, Actavis' offer was too much for Allergan's board (and it's shareholders) to ignore.
2. Puma Biotechnology (NASDAQ:PBYI) investors also benefited from takeover chatter in 2014, but unlike Allergan, no suitor has yet to emerge. The company, founded by the same person behind Cougar Biotechnology, which was sold to Johnson & Johnson in 2009 for $1 billion, is working on neratinib, a treatment for HER2-positive breast cancer. Investors hoping that trial results will prompt a big pharmaceutical company to make a bid for Puma have yet to be rewarded and, as a result, shares have slid from a peak of $275 in September to less than $200.
1. Edwards Lifesciences (NYSE:EW) may not be as big a company as competitor Medtronic, but its 103% year-to-date return makes it the best-performing big-cap healthcare company this year. Demand for Edwards transcatheter heart valve, or THV, which is used in high-risk patients as an alternative to traditional heart surgery, has grown significantly this year. In the third quarter, THV sales grew 55% year over year, boosting Edward's total revenue by 22%, to $607 million. Edwards expects that THV will drive sales higher in 2015, too. At its annual investor conference on December 8, the company issued guidance for 15% to 25% growth for THV products next year, leading to company-wide sales growth of between 7% and 11%. Whether that will prove to be good enough for Edwards to deliver a repeat performance to investors next year, however, remains to be seen.
Tying it together
It's impossible to know what companies will be top performers in any given year, but analyzing this year's top performers offers two common themes. First, investors continue to reward innovative new technology and medicine; and second, that consolidation remains alive and well. This suggests that investors hunting for next year's winners should focus their attention on identifying companies that are marketing and developing the next generation of disruptive solutions.