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More Investors Turning to Health-Care Stocks

Wall Street: Drug, HMO and other medical shares are gaining while tech sector falls from favor.

October 26, 2000|From Times Staff and Wire Reports

Trying to find a cure for the stock market's October blues? So far, health-care stocks have been just the ticket.

While the market in general has stumbled this month, and technology stocks in particular have all but collapsed, several health-care-related sectors have managed to produce decent returns for investors.

Shares of hospital companies have been especially buoyant, with the Morgan Stanley health-care provider index up 8.1% in October, compared with a 12.1% decline in the Nasdaq composite index.

Even with the shaky October performance by biotechnology shares--probably inevitable given the group's 86.7% gain year to date--the Standard & Poor's health-care composite index is up 4.4% for the month.

Whether health-care stocks continue to provide relief remains to be seen. While health-care companies' quarterly earnings reports Wednesday were generally upbeat--in stark contrast to the recent profit news from many tech and telecom firms--one biotech company raised a red flag of slowing sales next year.

Among the more encouraging reports was that of Affymetrix (ticker symbol: AFFX), the world's biggest maker of chips used in genetic research. The company reported its first quarterly profit and predicted a fourth-quarter profit. Shares of the Santa Clara, Calif.-based company rose $16.05 to close at $68.36 in Nasdaq trading--a 30% increase.

"For years, this is what people have been investing in Affymetrix for. We're seeing that now, and we expect to see that grow in the next few quarters," said Scott Greenstone, an analyst with Thomas Weisel Partners who has a "buy" rating on the stock.

The company's most recent quarterly results have given investors renewed confidence that Affymetrix can maintain its lead in the market, analysts said. Affymetrix's growing profit will enable the company to drive down the price of its chips and become more competitive, Greenstone said.

Two big health maintenance organizations also reported sharply higher earnings.

WellPoint Health Networks (WLP), one of the nation's largest health insurers, said third-quarter earnings per share rose a better-than-expected 24% as membership in its health plans continued to grow. Shares of WellPoint, based in Thousand Oaks, rose $1.25 to close at $104.50 before earnings were announced, though the shares slid to $104.13 in after-hours trading.

The company attributed the rise in membership to continued growth in its core California market, its acquisition earlier this year of Chicago-based Rush Prudential Health Plans, and growth in its individual and small-group plans outside California.

Oxford Health Plans (OXHP), one of the biggest New York-area health insurers, said third-quarter profit almost tripled as it cut expenses, worked with doctors to control medical costs and raised premiums. Salomon Smith Barney Inc. analyst James Lane on Wednesday raised his rating on Oxford to "outperform" from "neutral." Oxford's stock rose $3 to $30.06, then climbed to $31 in after-hours trading.

HMO stocks in general have rocketed this year, fueled by strong earnings growth as the companies have boosted premiums after dismal results in 1999. The Morgan Stanley HMO stock index is up 61% year to date, and rose 1.7% on Wednesday.

Major drug stocks also have been hot in recent weeks--despite rhetoric in the presidential election campaign that has raised the possibility of federal price controls on drugs. The Standard & Poor's index of seven major drug shares jumped 3% on Wednesday, led by Pfizer (PFE), up $1.94 to $44.94; Merck (MRK), up $1.88 to $87.31; and Pharmacia (PHA), up $1.88 to $56.88.

Less positive Wednesday, however, was the report after the close of regular trading from Chiron (CHIR). The biotech company reported a 35% increase in third-quarter profit and growth in all its business units--but warned of a slower 25% growth rate on a cash basis for next year.

Chiron's stock, which had ended the regular trading session at $50.44, up $1.44, slid to $48.50 in extended-hours trading.

Analysts remained upbeat. "Chiron had a strong quarter and their guidance for next year was encouraging," said Dennis Harp, an analyst at Deutsche Banc Alex. Brown.


Healthy Returns

With the exception of biotech issues, health-care stocks have outperformed the broader market during October.


Pctg. change: since for Index Sept. 29 YTD HMO stocks* +8.1% +49.4% S&P health care +4.4 +26.9 Amex drugs +3.8 +22.3 S&P 500 -5.0 -7.1 Amex biotech -5.1 +86.7 Nasdaq comp. -12.1 -20.6


* Morgan Stanley index

Source: Bloomberg News

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