Bellevue AM decrypts opportunities in US healthcare sector
Zurich based Bellevue Asset Management assesses in its latest market comment that the political noise from US presidential elections masks changes in the American healthcare system and that these changes would eventually provide opportunities in the sector.
“Market fears about the economic impact of the Affordable Care Act on the healthcare industry some five years ago created a prolonged bull run opportunity for investors in US healthcare stocks up until last fall when the political discussion of the presidential primaries led to a dialog on pricing controls, further government moves to a single payer system, and alternatively, positions on outright appeal of the Affordable Care Act.
“Stock market reaction to the “political noise” was negative using this discourse to take profits and turn far more risk adverse in front of potential increases in interest rates and a stronger US economy,” recalls Bellevue Asset Management.
The Swiss manager underlines that did not happen and brings a 2017 positive outlook for healthcare investors as it believes healthcare company financial performance is now likely to look relatively stronger in 2017 than previously expected.
Bellevue AM says valuations now look very attractive relative to the S&P 500 and historical comparisons for P/Es and PE/G ratios, especially in biotech, generics and services.
“Medtech has been the better performing sector so far this year, but still looks reasonably valued given its relative growth prospects and cash flow generation,” it points out.
The company says investors in US healthcare stocks should consider three key points over the coming weeks.
“(1) The November presidential elections are a big guess at this point. Regardless of who wins, it is highly more likely that Republicans while losing some seats, will maintain control of the House and probably the Senate. Thus, legislative change will be slow.
“(2) State actions to deal with the financial burden of health care spending may prove to be the most effective path to capping healthcare costs. Our insights on what is happening in Massachusetts, New York and California suggest a real solution to capping healthcare inflation.
“And (3), if we are right about what happens at the state level, “innovation and consolidation” will be the winning theme for investors in 2017 and beyond.”
Bellevue AM believes an ongoing healthcare reform in the US looks inevitable as the Affordable Care Act was promised to make healthcare affordable and check healthcare inflation but did neither.
“It did create an enormous ongoing tax burden (as defined by the US Supreme Court) on the middle class and is likely to be a key reason for slower than expected consumer spending contributing to the slow US economic recovery over the past six years. This is not to say it was all bad. More
“Americans have healthcare insurance and some of the inequities of the previous system were eliminated such as the denial of insurance for pre-existing conditions. But the journey is not over,” the manager comments.
It observes that the ACA is still very unpopular in the US and that Clinton and Trump positions on healthcare reform “suggest little substance in addressing the real, critical issues – healthcare’s economic burden and rate of inflation.”
Bellevue AM says that ongoing changes in the industry would make business winners companies that deal with innovative drugs, devices and solutions to treating disease and controlling costs.
“Price will be more of an issue for me-too products and solutions. Here size will matter as those best positioned to offer high quality products at best prices and in the broadest scale will win the business.
“Companies in this second model will need to get bigger or sell out as gross margin is likely to contract offset by reductions in bloated sales and marketing expenses that have driven demand for the past few decades,” it says.
Bellevue AM views the US healthcare as a growth industry, still rewarding for innovation and with invetable consolidation on the way.