OCTOBER RECAP & BEYOND

Broad market volatility.
Broad market volatility punctuated October, with both the Dow and the S&P erasing gains for the year. Drivers of downward pressure were worry of rising interest rates, global trade war concerns, and to a lesser extent concern about the mid-term elections. The volatility index (VIX) reached its highest level in six months, closing above 20 at the end of October. The healthcare sector was down 6.8% on the month with biotech and med tech leading the charge of underperformance, down 13.6% and 10.8% respectively.

MARKET COMMENTARY

Healthcare stocks erasing gains.
In addition to the broader market volatility, healthcare stocks which have largely been out-performers for the first nine months of the year, saw pressure driven by worry around Q3 earnings. Within the medical device sector, earnings results for Q3 have largely been in-line to positive relative to expectations, but not strong enough to overcome skittishness in the market and negative stock price reactions.

Medical device puts and takes.
Johnson & Johnson was one of the few medical device stocks that was up for the month of October (up 1% for the month), while high expectations and valuations for growth stocks lead to some of the worst performing names in the month, Abiomed, iRhythm, Insulet and Nevro. Additionally, traditional large cap medical device companies gave back much of their premium to the S&P, trading at a 14% premium versus a 19% premium in the month prior.

IPO Pricings.
The deal market remains active, despite the volatility, but stock prices of recent IPOs have also been under pressure, driving mixed aftermarket performance. Of the 12 healthcare IPOs priced during the month, seven priced below the range, while six finished the month flat from pricing. In the medical device sector, SI-Bone and Axonics are SMID caps that were flat and up 25% from pricing respectively. Guardant Health and Twist Bioscience marked a resurgence of interest in the Tools and Diagnostics sector for new issues albeit, with Guardant’s market cap and aftermarket performance eclipsing Twist Bioscience.

Source: Thompson Reuters and FactSet