Healing Healthcare: Wall Street Winners & Losers
As the push for universal health care in the U.S. heats up on Capitol Hill, market experts say generic drug stocks and hospitals should perform well, while the hit to big pharma may not be as bad as some think.
The Healthy Americans Act was introduced into the House earlier this week after being introducted in the Senate last January. The bill is the first meaningful effort since then-First Lady Hillary Clinton's highly publicized failure to revamp the federal health care system.
Public policy experts estimate as many as 47 million Americans do not have health insurance and healthcare spending in the United States, running at more than 15% of gross domestic product, is the highest of all industrialized nations.
Rising costs for employee health plans are increasingly troubling to corporate America and a growing number of CEOs are speaking out.
Wal-Mart Stores CEO Lee Scott has become a vocal champion for universal health insurance, while General Mills CEO Stephen Sanger recently told CNBC's Bertha Coombs that the current system is unsustainable and needs replacing.
Insurance giant Aetna is also a proponent of a universal system.
"We believe that everyone should have access to health insurance," Aetna's CEO Ronald Williams told CNBC. "We are very much interested in being a part of the solution and have invested in products and capabilities to help people gain access to health insurance."
Who Stands to Benefit?
Though it is still too soon to say what a new system would be like and how it would work, companies well-positioned in specific areas such as generic drugs will clearly benefit. Other sectors that should reap the benefits of universal healthcare, however, are less apparent.
James Gale, who oversees three life sciences private equity funds for investment bank Sanders Morris Harris, said companies that create second-generation drug products should be successful.
Abraxis Biosciences developed and markets a drug that fits this bill. The company's Abraxane breast cancer treatment has seen strong sales since its launch in 2005 and analysts are forecasting year-end sales of approximately $300 million.
"Obviously, the generic drugs industry will continue to prosper, though only those companies with the ability to produce difficult-to-formulate drugs will enjoy favorable margins," says Gale.
Barr Pharmaceuticals , for one, has done well with producing hard-to-make generic drugs. They should experience lower development risk while creating an improved product compared with the first-generation product.
Gale added that drug companies that are successful at formulating treatments that address unmet medical needs such as Alzheimer's disease or multiple sclerosis should also benefit. A handful of companies come to mind: Elan co-markets multiple sclerosis drug Tysabri with Biogen Idec and Neurochem, which is developing a treatment for Alzheimer's.
"They will be successful as their cost should be less expensive than prolonged treatment to deal with disease consequences," says Gale.
Anne K. Anderson, an analyst with Atlantis Investment, says hospital operators such as Tenet Healthcare, LifePoint Hospitals and Community Health Systems would see the most significant advantage from universal health coverage, even if it included some pricing pressure.
"It would transform a very expensive category with billions of dollars of care lost to uninsured patients, to revenues," Anderson said. "They would experience much lower bad debt because they would not be paying for uncompensated care."
Anderson noted that she has had a "sell" rating on Dallas-based Tenet, which has struggled in past years due to fraud allegations and other issues.
Anderson said big pharma is also likely to benefit since many of the uninsured are relatively young. College students are said to make up about 15% of those Americans without health coverage.
"They have problems that can be treated with pharmaceuticals rather than expensive medical procedures," Anderson said. "Any company related to pharmaceuticals would benefit; it would expand the market for some biotech products with people who may not be qualifying for coverage right now."
'Universal healthcare is not necessarily bad for pharma'
While it would appear that a federal health plan would exert pricing pressure on big pharma companies such as Pfizer or Merck, analysts believe it may actually help them.
"Universal healthcare is not necessarily bad for pharma," says Les Funtleyder, healthcare strategist at Miller Tabak. "You will get more sales volumes because as people get more coverage they will get more drugs. If Medicare Part D is any indication, then demand for drugs will be beyond what the existing market is now."
Government drug subsidies from Part D, which went into effect in January 2006, have fueled strong prescription drug growth and has boosted shares of pharmaceutical benefit managers such as Express Scripts and Medco Health Solutions, in addition to drug distributors Cardinal Health and McKesson.
These companies, Funtleyder says, are likely to be unaffected should America shift to universal health insurance. "Either way, someone has to warehouse the drugs, so I would say it's positive for them."
The outlook is less rosy for managed care companies such as Aetna and UnitedHealthCare , since universal healthcare could potentially wipe out the HMO business.
"For those who already have coverage, under a universal health system they would make changes in their plans and that kind of volatility would cause churn," says Anderson.
'Devil in the details'
"The devil is in the details: Who pays for the drugs and how will they negotiate prices?" asks Funtleyder.
For now, Wall Street remains somewhat muted to the prospect of a universal health system. But this could change as it becomes more of a reality.
"People with a long-term time horizon are actually thinking about it a little bit, but most investors have a shorter time horizon," Funtleyder says. "There are too many variables right now, but I suspect we haven't heard the end of it."
Peter Kang is a markets writer at CNBC.com and can be reached at firstname.lastname@example.org.