OVERVIEW
The healthcare 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 the present scenario, investor sentiment in healthcare continues to be driven by decisions in Congress related to government funding and the state of the broader economy. In view of the ongoing healthcare reform debate in Congress, healthcare policy changes remain an important indicator to investing in the sector.
Even though legislation — which aims to cover nearly all Americans by providing government subsidies to help pay premiums irrespective of health or income — was passed in the House of Representatives, it is facing opposition in the Senate mainly due to the government’s intention to compete with private insurers.
Under the legislation, practices such as denying coverage on the basis of pre-existing medical conditions would be discontinued and insurers would no longer be able to charge higher premiums on the basis of gender or medical history. Furthermore, the industry would no longer enjoy an exemption from federal antitrust restrictions on price gouging, bid rigging and market allocation. Health insurers such as UnitedHealth Group Inc (UNH) and Cigna Corp (CI) could face increased competition, more scrutiny and fewer protections under the bill.
The House version of the bill would not be profitable to drugmakers like Pfizer Inc (PFE), GlaxoSmithKline Plc (GSK) and Merck & Co Inc (MRK). They would be required to pay rebates to the government for drugs used by the elderly and disabled Medicare patients who also are on Medicaid.
However, medical devicemakers such as Boston Scientific Corp (BSX), Medtronic Inc (MDT) and Stryker Corp (SYK) welcome the bill, as they have been successful in reducing an expected $4 billion in tax payment on annual industry sales in the United States to $2 billion. Furthermore, the bill is welcomed by biotech companies such as Amgen Inc (AMGN) and Roche AG’s Genentech, as their medicines would enjoy protection from cheaper copies for at least a dozen years. Generic drugmakers like Perrigo Company (PRGO) favor a shorter period.
OPPORTUNITIES
Health technology holds the promise of improved operating efficiencies for many parts of the healthcare industry, hospitals included. However, in the short term those that stand to benefit the most from the stimulus are companies whose business models are based on information technology platforms.
One such company is BioScrip, Inc. (BIOS) on which we have an Outperform rating. BioScrip is a specialty pharmacy services provider and pharmacy benefit manager. It operates two interrelated business segments: Specialty Services, which comprise specialty pharmacy distribution and clinical management services; and PBM Services, which comprise 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. Meanwhile, the introduction of new specialty and biotech drugs in the coming years should help maintain growth in the specialty business segment.
Another company we recommend to investors is ZOLL Medical Corporation (ZOLL). We are pleased with 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 the global market for external defibrillators, which is worth over $1 billion annually. 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
Another company on which we are positive — despite its current Neutral rating — is Humana Inc. (HUM), one of the largest healthcare plan providers in the U.S. Humana’s Medicare business is on the rise, offsetting the weaker results in the Commercial business.
The privatization of Medicare is also helping Humana. Having expanded from a regional to a national presence, Humana offers at least one type of Medicare plan in all 50 states. Therefore, the growing membership base provides it with greater leverage to expand the network of Preferred Provider Organization (PPO) and Health Maintenance Organization (HMO) providers.
WEAKNESSES
We recommend avoiding names like Molina Healthcare (MOH), on which we have an Underperform rating because of its declining profitability attributable to increasing medical costs due to the H1N1 influenza pandemic and costs associated with recently enrolled members. The impact of the pandemic is significant and has the potential to worsen in the coming quarters, affecting its profitability further.
Another name to avoid would be Hologic, Inc. (HOLX), on which we also have an Underperform rating. The global economic downturn has affected Hologic’s business adversely. The stringent economic and capital spending environment has brought about a decrease in sales of its products, thereby adversely impacting its revenues.
Another name that we recommend avoiding is Luminex Corporation (LMNX). We are highly concerned about the intense competition in the life sciences industry in which the company operates.
The industry is characterized by rapid and continuous technological innovation. If Luminex is unable to respond to the changing requirements, then its survival in the industry will be in question. Furthermore, its dependence on partners for revenues and growth-by-acquisition strategy has inherent risks. Our Underperform rating on the stock stems from these concerns.Zacks Investment Research
