Just when it looked as though the stock market couldn't possibly finish the year higher, after its swoon in October, it proved the naysayers wrong. As of this writing, the S&P 500 has risen by 11% for the year, a tad bit higher than the stock markets' historic annual return.
But if you think that's a solid return, then your jaw will drop when you see the gains delivered by the healthcare sector this year -- especially biotech stocks. The SPDR S&P Biotech ETF has nearly quadrupled the S&P 500's gains for the year, rising a whopping 41%.
According to data from Finviz, 33 of 358 healthcare stocks with a market value over $300 million have delivered a return of 100% or greater so far in 2014. That's nearly one in 10! While some of these impressive returns were completely random or driven by one-off events, such as a long-awaited clinical trial, many of the best healthcare stocks exhibited one of three traits which sent them rocketing to the stratosphere.
Let's take a closer look at these three traits so you can better understand why the best healthcare stocks in 2014 performed so well.
Trait No. 1: Buyouts and consolidation
Perhaps the biggest driver of some of the best healthcare stocks this year was the need for bigger companies to fuel their growth through acquisitions.
This rang truest in the pharmaceutical sector where some of the world's largest pharmaceutical companies are battling the loss of exclusivity on key drugs. Pfizer witnessed the loss of cholesterol-lowering drug Lipitor, the best-selling drug of all time based on cumulative sales a few years ago, and is losing its exclusivity on anti-inflammatory Celebrex this month. Rival Merck lost its exclusivity on blockbuster asthma treatment Singulair as well. I'll stop there, but trust me: the list itself is much longer than this snippet of info.
In order to counter the loss of exclusivity on core drugs, big pharma has turned toward acquisitions. Earlier this month, Avanir Pharmaceuticals (NASDAQ:AVNR) agreed to be purchased by Japan's Otsuka Pharmaceuticals for $3.5 billion, giving Otsuka access to pseudobulbar affect drug Nuedexta, but more importantly the rights to AVP-923, an experimental Alzheimer's disease drug meant to curb agitation related to the disease. Avanir shares are up better than 400% for the year, which is good enough for tops in the healthcare sector.
RNA-interference drug developer Prosensa (NASDAQ:RNA) is another big winner due to an acquisition. Prosensa shares are up more than 300% on the year after rare disease drug specialist BioMarin Pharmaceutical agreed to buy Prosensa for $17.75 per share as well as an additional $160 million in contingent value if experimental Duchenne muscular dystrophy drug drisapersen is approved by certain dates in the U.S. and Europe. DMD is a rare disease that currently has no approved targeted treatments.
Juicy buyout candidates could continue to be among the best healthcare stocks to own heading into 2015.
Trait No. 2: A focus on chronic or widespread diseases
For both acquired companies and those which are still very much independent, product pipelines with a focus on chronic or global diseases generally had very good years. This includes companies which are developing cancer treatments, such as TG Therapeutics, but also companies like Achillion Pharmaceuticals (NASDAQ:ACHN) that are attempting to treat global diseases that may otherwise fly under the radar, like hepatitis C.
Following a rough start to the year, Achillion shares have come on strong (currently up 306% year to date) as investors are clearly excited about its nucleotide-based inhibitor product pipeline. Small patient studies have yielded strong results thus far, including data released at the annual American Association for the Study of Liver Disease meeting last month that showed a 100% sustained virologic response in 12 patients when combined with Gilead Sciences Sovaldi. With the World Health Organization estimating there are 180 million people worldwide with hepatitis C Achillion's market potential is still sizable.
Trait No. 3: A new approach
Lastly, some of the best healthcare stocks for 2014 have been riding high because they're taking the path less traveled. In other words, they're developing a new treatment that works differently or reacts via a different pathway than existing standards of care.
Take Agios Pharmaceuticals (NASDAQ:AGIO), which is up nearly 350% year to date, as a good example. Just last week, Agios and collaborative partner Celgene released ongoing phase 1 data for AG-221 as a treatment for advanced hematologic malignancies. AG-221, a single-agent drug that targets IDH2-mutant positive advanced blood cancers, exhibited durable clinical activity in a whopping 56% of the 45 evaluable patients. Furthermore, toxicity was noted as minimal. Both the response and toxicity are impressive considering the advanced nature of the disease of treated patients.
Diagnostic test developer Exact Sciences (NASDAQ:EXAS) was another beneficiary of trying something new. Exact Sciences stock gained just shy of 150% this year after the Food and Drug Administration approved its non-invasive colorectal cancer test known as Cologuard. Although Cologuard isn't designed to replace a colonoscopy, it does provide an initial non-invasive step for patients with much-improved cancer and pre-cancer cell sensitivity detection than the previous diagnostic standard of care.
There's no guarantee that these three traits will again lead to the top-performing healthcare stocks in 2015, but sticking to companies which have the potential to be acquired, are focused on widespread, unmet diseases, or which have a novel approach to treating a widespread disease are likely to have a better than average shot at moving higher.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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