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T. Rowe’s In-House Doctor Gives Healthcare Stock Picks for 2013

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T. Rowe Price’s doctor is in–and diagnosing where the best stock picks can be found in the healthcare sector as reforms take hold next year.

According to Mark Bussard, a research analyst in the U.S. Equity Division for the Baltimore-based asset manager who earned his medical degree at the University of Virginia, the healthcare sector’s returns have outpaced the market over a multiyear period, but that the sector’s outlook for 2013 depends on the success of reforms that will start taking place in President Obama’s second term. 

Winners under reform will include companies and business models that have offered free medical services to patients until now but that can expect reimbursement under the Affordable Care Act, Bussard said. These include Medicaid, hospitals, healthcare information technology and volume-driven low-margin businesses.

While there are no absolute losers, he said, mixed results will be seen in the managed care, pharmaceuticals, biotechnology and medical devices sectors.

“However, opportunities are plentiful in all groups because winners often are underappreciated and losers overly discounted,” Bussard said at a 2013 investment and economic outlook briefing in New York on Nov. 20.

The T. Rowe Price healthcare team agrees that the days of indiscriminate spending are over, and the sector next year will face greater headwinds as entitlement reform tackles U.S. healthcare’s massive fiscal liabilities.

On the up side, medical innovation will drive “significant” shareholder value, provided it delivers a clinical benefit, according to Bussard, who was a co-founder of Rivanna Pharmaceuticals, an early stage biotechnology firm, before he joined T. Rowe Price in 2005.

As of Sept. 30, T. Rowe Price Health Sciences Fund (PRHSX) average annual total returns were 35.25% year to date, 47.93% for the one-year period, 22.85% for three years, 11.20% for five years and 14.69% for 10 years. The fund’s total net assets are 31.7% invested in biotechnology, 26.5% in services and 22.7% in pharmaceuticals.

The fund’s top holdings include Gilead Sciences (GILD), whose HIV medicines Bussard credits for dramatically improving patient outcomes and transforming the standard of care of HIV therapy, and Catamaran (CTRX), a pharmacy benefits manager and established Medicare Part D player.

At the outlook briefing, Bussard also gave favorable mentions to Edwards (EW), whose transcatheter valve improves patient outcomes at lower cost, and Intuitive Surgical (ISRG), whose robotic surgery system also improves patient outcomes at lower cost.


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