From the tragic explosion at the World Trade Center to persistent volatility tied to the economy and proposed tax changes, this has been a traumatic year for Wall Street.
The health care industry, under fire from the Clinton administration for boosting costs unnecessarily, typifies investor disruption.
Shareholders who bragged of the solid growth of their blue-chip holdings became mute after watching them take a nose dive amid talk of pending change. Other investors became hysterical, dumping all health care shares.
"No longer will you see high-growth drug companies with predictable gains in the mid to high teens," predicted Jerome Brimeyer, pharmaceutical analyst with Lehman Brothers. "Certain stocks will be value stocks, others will be similar to the traditional drug stocks of the past and still others will become risk-oriented."
Considerable industry excess took place in the 1980s, before health maintenance organizations had major impact on pricing.
Pharmaceutical companies, according to a recent congressional study, have earned at least $36 million more than development costs on each new drug and have been able to raise prices for name-brand drugs even after they lost patent protection.
However, after 10 percent price gains in the 1980s, the rise in list prices was 6 percent in 1992, will be 4 percent in 1993 and could be flat in 1994. Actual pricing is several percentage points lower. Though the trend began before recent reform talk, the industry must now take its medicine.
"There will be stress short-term and employment in the pharmaceutical industry will shrink," said Richard Vietor, pharmaceutical analyst with Merrill Lynch & Co., who doesn't believe drug stocks will do well for two years. "There's no need to own a lot of drug stocks, because, while some look statistically attractive, it will be difficult to make money."
Managed competition to hold down costs is where the Clinton administration is headed.
Overseen by a National Health Board, managed competition would band employers and individuals into large cooperatives to purchase health insurance. This would give small businesses and individuals the bargaining power of big companies. Doctors, hospitals and insurers would be forced to form partnerships to compete for cooperative business.
"The health care industry won't go out of business, but you must carefully go through your portfolio and look at each holding," advised John Hindelong, health care industry analyst with Donaldson Lufkin & Jenrette.
Managed competition, according to Kenneth Abramowitz, health care industry analyst with Sanford C. Bernstein, "will force companies to compete on pricing and quality, resulting in winners and losers."
Pfizer Inc., which had lower profit margins to begin with and strong foreign growth potential, is recommended by Vietor and Brimeyer.
American Home Products, with strong presence in women's care products and over-the-counter analgesics, is a Vietor suggestion. So are Medco Containment Services, which sells mail-order drugs at cut-rate prices, and drug delivery systems Elan Corp. and ALZA Corp.
Vietor foresees problems for traditionally strong companies such as Bristol-Myers Squibb, Eli Lilly & Co., Syntex Corp. and Upjohn Co.
Schering-Plough, an undervalued stock in a company with diverse markets and product lines, is a Brimeyer choice. If an investor can accept volatility until Clinton proposals are made clear, most likely in May, he should hold on to pharmaceutical stocks and perhaps even buy more on price weakness, Brimeyer believes.
Acute care offers excellent opportunities with companies such as Hospital Corp. of America and Healthtrust, Hindelong added. Respiratory therapy, unscathed by proposed Medicare cuts, features Lincare Holdings with in-home treatment. The long-term care industry offers Living Centers of America.
Some fields that won't bounce back are home infusion and psychiatric care, Hindelong believes.
Johnson & Johnson, Abbott Laboratories, Baxter International and Medtronics Inc. are solid because they're innovative and don't depend on a few blockbuster products, said Abramowitz.
In HMOs, which Abramowitz believes will replace insurance companies, U.S. HealthCare and United Healthcare stand out.