Investment Recommendations Across Healthcare, by Sub-Sector

Richard

Key themes are new product flow, rising per-capita unit demand, direct and indirect effects of the Affordable Care Act (ACA), and mid-term pressures on US (small molecule) drug pricing

Overweight recommendations:

Select Specialty Pharmaceutical and Biotech names with pending new product flow

Commercial HMOs in early 2013 because of low valuations and the likelihood of rising enrollment; as 2014 draws closer we prefer Medicaid HMOs
Select Non-Rx Consumables names (e.g. CFN, OMI, BCR, BDX, COV) where revenue expectations fail to reflect likely near- (employment) and mid- (ACA) term drivers of demand

Hospitals, where revenue expectations also fail to reflect near- and mid-term demand; however as 2014 approaches we recommend reducing Hospital weights in favor of Non-Rx Consumables

Professional Services / IT, where evolving meaningful use standards and greater hospital / physician inter-connectedness accelerate IT-related capital spending. Companies with strong IT positions in larger hospitals (e.g. CERN) are preferred

Dental manufacturers and suppliers – these names benefit from rising per-capita volumes as employment improves; and, more than is the case in broader healthcare, we believe average product mix per-visit also improves with rising incomes and employment. XRAY and PDCO are preferred

 Underweight recommendations:

Large-cap Pharmaceuticals – US real pricing power accounts for an overwhelming percentage of global growth for most names (Roche is a particular exception); changes to benefit structure may dramatically reduce US pricing power in the middle-term

Drug Retail / Drug Wholesale / PBMs – States are likely to abandon the Average Wholesale Price (AWP) pricing benchmark this year; commercial plan sponsors should follow

Medical Equipment and Supplies – overall healthcare-related capital spending should flatten in 2013, and IT should take a rising share of the capital that is spent. Against this backdrop sellers of capital equipment in the Medical Equipment and Supplies sub-sector reflect expectations of double-digit sales growth

Research Tools & Services – expectations for revenue growth exceed sales expectations for commercial sponsors of research, despite the likelihood R&D as a pct of sales should actually fall. A federal budget sequester only makes matters worse by substantially reducing NIH research funding

For full text research, please see our published research archive

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