From the Thomson Reuters: Reuters Insider Series: Inside Equities
Thursday, June 28, 2012, 11:45 AM
Crystal Research analyst Jeff Kraws runs down the winners & losers from Obamacare and points out the reform bill will discourage pharma and biotech from creating new and innovative products.
Transcript from Reuters:
Healthcare stocks having very different reaction to the Supreme Court's ruling on Obamacare. Will the initial reaction hold? For more, I'm joined by Crystal Research Analyst Jeff Kraws. Great to have you here, Jeff. My pleasure. All right. We're seeing stocks go mainly lower when you talk about insurance companies. We've seen some other stocks rally. So let's go through these sectors and see if this is the right sort of way to be playing these stocks. Insurance- what happens? On the insurance sector right now, the insurance companies are picking up 30+ million people who previously weren't included in their coverage. For them, unfortunately, you're going to have a lot of people with preexisting conditions that are very expensive to them that they have to now pick up and cover for a very small premium. So while you're gaining on volume, depending on what happens with the Medicaid expansion, it could be positive or negative for them. Okay. How about hospitals? Hospitals are very positive. You've had people who are walking into the hospital who previously had no coverage. While there's talks now that they're only going to get $7 for every $100 spent on those people, it's $7 that they had versus nothing. So you're looking at HCA Holdings, Tenet and Universal which will be the big beneficiaries of this because now you have people who walk in the hospitals who previously had no coverage and now you have a way to recoup it. You are getting those patients anyways, at least now, you're getting something positive for them. Medical device makers? Medical device makers are negative. Medical device makers such as Intuitive, Medtronic, U.S. Surgical, Zimmer, and even the smaller companies, are really going to be dinged by this because there's a 2.3% excise tax which is going to start being imposed on them next year. It may not seem like a lot but if you're a smaller company and most of your revenues are based in the United States, for some smaller companies it could be 30% or 40% of their EPS. Wow! So, it's a big negative for medical device companies. And don't forget the big pharma companies which also have medical device stories within them. That's right and some have had hits or misses with those too. What about pharmaceuticals overall? Pharmaceuticals overall, well, you've got the $70 billion donut hole makeup that you're supposed to be doing over the next 10 years of your pharma company. The good news is you're picking up 30 million to 32 million people who possibly wouldn't have been using your drugs as much as they could have been if they had insurance; now, they will have insurance and coverage. So theoretically, if they are more educated on what prescription drugs can do for them, they will increase utilization. That said, a lot of this insurance plan is formulated, or medicated if you will, towards generic drugs. So, if you're a pharma company, I don't think you're really going to see a benefit of this. I mean you are picking up a lot of utilization but how much of the utilization is going to be the new most innovative, most expensive pharmaceutical products? And so they would move as a group, there's not certain ones to standout? They would move as a group. All right. Then let's break that down a little bit further. What about biotech? Biotechnology, once again, it's a negative for biotechnology. It's a negative for if you're an innovator in research and development trying to help keep people alive, it's a negative for you, because these excise taxes and these burdens are these being placed on you. The beneficiaries of this are middlemen and people who are just using mass produced technology like a generic drug company which isn't really an innovator at all. Biotechnology companies which are the key for, I believe, lowering healthcare expenses long term in conjunction with pharma companies, they're going to be punished. They're going to be punished because, once again, I don't think you're going to see a tremendous number of these people going on a $50,000-$100,000 a year drug. And if you do then it's going to be a huge burden for those insurance companies. So unless those companies are say located overseas like biotech? Right, unless those companies are located overseas. Medical record, something that we don't often think of as being included but there's probably some interesting names there. athenahealth, Cerner, Document Capture Technology which makes scanners to help get records electronic, Allscripts Healthcare- there's been this movement since Obamacare to switch all records over to digital records. That's going to continue if not accelerate right now because they want everything to go digital. Eventually, they basically want you carrying a little FOB you'll be able to lock, and have your x-rays and all your medical records all in one stick.
I'm sure I'd lose that. I find that all a little bit scary myself. We would. I think having your records anywhere digitally, all your records digitally, in case you ever got erased permanently is an issue but it's going electronic. And whether you're an Allscripts or an athena, or whether you're a Document Capture which is using scanners to take records and make them electronic- those guys who do handheld scanners and et cetera, don't forget about them. They're going to be big. How about medical schools? Is it going to be a good profession in terms of- I think it's bad news for medical schools. The reason it's bad news for medical schools is right now you're taking a lot of the innovation in healthcare, you're taking a lot of the treatment expertise and a lot of the discretion out of it.
People say you're not but the reality is you walk in and you're covered under the Obamacare plan, under this prescription plan, you know they look at what drugs are covered for your therapeutic area of cardiovascular disease, and they'll give you one of the generics. You're not going to get the proprietary drug most likely, that's the expensive the drug, you're going to get the therapeutic substitution and that really takes away from the innovativeness of a doctor to be able to do what he's supposed to do which is treat you and make you healthy, and to do the best he can to keep you alive. Is there any particular sector that now might be right for some consolidation? Oh yes. I think a lot of sectors, if you look at the insurance companies, like United Healthcare said they weren't going to change no matter what the Obamacare decision was, they are going to continue to offer insurance to people, which is great for them to do, and they had built that into their estimates and their forecasts so that was wonderful. But if you're other insurance companies then you really have to realize your margins are thin. You've got this patient population group coming in but with preexisting conditions, that can be very expensive. It's like your version of a natural disaster for an insurance company. So, that sort of leads to the premise of with razor thin margins and especially you talk about the managed care HMOs- we didn't even touch on that- the managed care HMOs, this puts a lot of pressure on them. Depending on what happens with the Medicaid and Medicare in states, it could put a lot of pressure on them, But when you look at consolidation, certainly in the HMOs, you're going to see consolidation because they're going to be forced to. You've got razor thin margins. You're going to want to gain on volumes. And the insurance sector once again, it's a volume business. Generic companies are already been expanding tremendously- probably going to put a lot of pressure on medical device companies with the earnings the way they're going and maybe create some opportunities for larger medical device companies to buy some of these smaller ones if they get hit significantly enough as we move into next year with their earnings and their stock prices are depressed. Any particular names you're watching on that? We're watching all of them. You have to know there's a lot of small medical device companies; too many to mention even on this sector. But the big ones that we talked about, you're looking at Intuitive, Medtronic, U.S. Surgical and Zimmer, those would be the acquirers. And HMOs and insurance companies, is there anyone for any reason that would stand out as somebody who would fare less worse- if you know what I'm saying- or are they all pretty much on the same- They're similar and it really comes down to where you're- if your state says they're expanding Medicaid, Medicare, versus your state says they don't, you've got a ton of your population or your patients there and you're an HMO, that could be really positive or really bad for you so it's really individual. You've got 26 states that have tried to appeal this, are they going to be the ones that fight this also? We have to wait and see but you certainly walked this through for us very well. Jeff Kraws, great to talk to you, from Crystal Research. Thanks, Rhonda. I'm Rhonda Schaffler. This is Reuters.
Source: Thomson Reuters: Reuters Insider.