The health care sector comprises different industries, ranging from managed care organizations, healthcare facilities providers and medical devices manufacturers to biotech and pharmaceutical companies. Consequently, we believe that investors in this sector should be mindful of the different drivers and appropriate metrics associated with the various sub-sectors.
In March 2010, U.S. healthcare reform passed through Congress, which aims to expand coverage to 31 million Americans who are currently uninsured. This translates into 31 million more customers for the health insurance industry, and 31 million more people for whom prescriptions might be written. Furthermore, the bill cracks down on insurance company abuses.
There are multiple pilot programs in the bill that have the potential to significantly reduce the growth in health care costs. However, most of the provisions of the bill do not come into effect until 2014; dramatic changes should not be expected right away. Among the more immediate changes, parents will be able to keep their kids on the family policy up to age 26.
As per the bill, the Medicare Advantage program will be cut back, so some seniors will lose the extra benefits they currently enjoy. The Medicare Advantage program costs the government substantially more per person than regular Medicare. This is bad news for health insurance companies like Humana (HUM), which are heavily reliant on the program. However, the prospect of more customers (and customers that are legally required to buy the product) will outweigh the loss of the Medicare Advantage subsidy program for the health insurance companies who are not big players in that field.
Furthermore, the bill is expected to impact hospital companies like Tenet Healthcare (THC) positively. The plan aims to expand the pool of insured patients, and this should aid hospitals’ bottom line. The reforms should go a long way towards reducing bad debt problems associated with hospitals.
OPPORTUNITIES
We are positive on Molina Healthcare (MOH), on which we have an Outperform rating. The company performed impressively in the first quarter of 2010, beating the Zacks Consensus Earnings Estimate by 23 cents per share. The better-than-expected results in the quarter were driven by higher operating revenues coupled with lower medical care costs on a per-member per-month (PMPM) basis because of a mild flu season.
Furthermore, there was an approximately 14% year-over-year rise in enrollment in the quarter. Additionally, the acquisition of the Health Information Management business of Unisys Corporation (UIS) should add value to Molina’s Medicaid health plan business. We believe that the current price represents an attractive entry point for long-term investors.
Health technology holds the promise of improved operating efficiencies for many parts of the healthcare industry, hospitals included. However, in the short term, those who stand to benefit most from the stimulus are companies whose business models are based on information technology platforms.
One such company is BioScrip, Inc. (BIOS), a specialty pharmacy services provider and pharmacy benefit manager. The company operates two interrelated business segments, namely Specialty Services, which consists of specialty pharmacy distribution and clinical management services, and Traditional Pharmacy Services (previously referred to as PBM Services), which consists of pharmacy benefit management and traditional mail services.
The company’s diversified product mix across several key disease areas including immunology, multiple sclerosis and oncology should drive growth. The oral oncology business continues to show robust growth and should remain a strong part of the company’s business. We are pleased to see that the company is working on expanding its national reach and local presence, and is adding infusion capacity in markets which have a large number of members.
We believe BioScrip is well-positioned to benefit from future healthcare reform initiatives like broader insurance coverage, the approval of a pathway for bio-similars and incentives supporting the utilization of information technology systems. The implementation of these initiatives is in line with the company’s strategy and should bode well for its future.
Another company with an Outperform rating is ZOLL Medical Corporation (ZOLL). We like the company’s wide range of products and significant international presence. The company has made multiple acquisitions in the past which have aided growth, and is looking out for more such opportunities.
The company is a leading player in external defibrillators market, which is worth over $1 billion annually on a global basis. ZOLL Medical has innovated a wide range of product features that have become the standard of care in the external defibrillator industry. The company is expanding its offerings to sustain growth.
WEAKNESSES
We recommend avoiding names like Myriad Genetics (MYGN), on which we have an Underperform rating. The company performed unimpressively in the third quarter of fiscal 2010, falling short of the Zacks Consensus Estimate as well as the year-ago earnings by 5 cents. The outlook for the company’s earnings remains weak given the continued negative trend in estimates. Myriad’s current Zacks Consensus estimates for this year and next have come down significantly in the past month or so.
Although the molecular diagnostics business is performing well, we remain concerned about the overall weakness in the economy. It has affected sales adversely in the recent quarters. The competition confronting the company’s products in the biotechnology and genetics testing field is also a concern.Zacks Investment Research
