Healthcare Sector: Opportunities And Weaknesses

The healthcare sector is not homogeneous and includes many different industries ranging from managed care organizations, healthcare facilities providers, medical device manufacturers through to biotech and traditional pharmaceutical companies. Investors in heathcare therefore should remain mindful of the different drivers and appropriate metrics associated with the various sub-sectors.

That said, and recent market volatility aside, long-term growth of the healthcare sector overall continues to be fueled by the aging of the population and decisions in Congress related to government funding. Changes to healthcare policy remain an important signpost to investing in the sector.

President-elect Obama’s pledge to address the issue of universal healthcare, coupled with the recent appointment of Tom Daschle to the position of Secretary of Health and Human Services and the commencement of information gathering meetings at the regional level, suggest healthcare reform initiatives will most likely be executed sooner rather than later. Funding for the State Children’s Health Insurance Program (SCHIP) is likely to be one of the first of the health care issues addressed by Congress during 1Q09.

Despite references by Democratic senators to target reimbursement levels paid to insurers that operate Medicare Advantage plans, we believe managed care overall will continue to play a central role in the distribution of healthcare services and an important sub-sector of healthcare for investors.  Furthermore, health plans could benefit from any efforts to reduce the number of uninsured.

Nonetheless, we believe further weakening of the economy would most likely exacerbate the already high level of uninsured in the population in the short term, which in turn will negatively impact other healthcare sub-sectors such as hospitals, and add to already significant levels of bad debt.

OPPORTUNITIES

Despite our currently neutral stance on managed care providers overall, we continue to rate Wellpoint (WLP) as a Buy given its broad product offering, geographic reach and potential for added synergy gains from relatively recent acquisitions. Furthermore, managed care companies in general remain well-capitalized and unlikely to be affected by the current credit crisis, negative investor sentiment aside.

Humana (HUM) also remains attractive at current levels. The company is one of the largest healthcare plan providers in the United States, with approval from The Centers for Medicare & Medicaid Services (CMS) to offer the Medicare Part D prescription drug plans (PDP) to the more than 42 million Medicare-eligible beneficiaries.

WEAKNESSES

Highly leveraged companies are obviously more likely to be affected by any deterioration of the current credit crisis.  For example, Healthsouth (HLS), which, despite efforts to reduce debt exposure, remains vulnerable.

Posted in Categories: Contributor, External Research, Health Care, Stocks.

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