SSR Index of Current-Quarter Healthcare Demand Growth, Final 2Q13 Estimate
We expect 3.1% (nominal) y/y growth in US health services demand during 2Q13, the product of 1.6% growth in unit demand, and 1.4% price growth. Unit demand growth remains very slow; the projected 1.6% rate is essentially equal tothe inherent rate of demand growth (1.5%) attributable to population growth and aging alone, and well below our long-term expectation of 2.8%
We continue to expect nominal pricing to decelerate 50 bps during the quarter, from 1.9% to 1.4%; this is a direct consequence of the 2% decline in Medicare payments brought about by the ‘fiscal cliff’ sequester. Dental is the only major health subsector that appears largely insulated from sequester effects
Independent of our quarterly growth rate models, we handicap the odds of a trend break, i.e. a significant acceleration or deceleration in demand. The trend-break model still indicates near zero probability – <2% – of accelerating demand in 2Q13
Our models correctly anticipated that the downward trend in unit demand would persist during 1Q13 – however the fall was even more dramatic than our pessimistic view. This is directionally consistent with company reported results from the quarter – where surprises to the downside of sell-side analyst revenue consensus estimates far exceeded positive surprises
Over the past month, sell-side consensus has increasingly reflected a more modest sales environment – full year 2013 consensus top-line growth estimates in our coverage universe have fallen by 20 bp over the past month. Large-cap Pharmaceuticals projections are off 70 bp during the same period, while Dental forecasts are up 40 bp
As we’ve consistently argued, we continue to believe that demand is weak primarily because of low employment, which translates into a smaller percentage of households having the benefit of the most generous source (employer-sponsored) of health coverage. Employment gains, expansion of Medicaid eligibility, and the initiation of state health insurance exchanges all are likely to expand the availability of health coverage in the relatively near-term
We recommend a healthcare portfolio that balances US focused, volume levered names with selective bets on innovation (specifically innovator companies with pending or recent major new product approvals, and/or high-quality early- to mid-stage pipelines that appear undervalued)
This translates into overweight positions for Biotech; Hospitals; select Non-Rx Consumables (especially more US-focused names such as CFN and OMI); select HMOs (emphasize exposure to small group ASO, such as CI, and/or Medicaid, like WCG and MOH); Health IT; and select Dental names (emphasize more US-focused names with product lines that include higher-mix items, such as XRAY and PDCO).
We recommend underweight positions in Large-cap Pharmaceuticals and Specialty Pharmaceuticals (on US real pricing power concerns); drug trades (Retail, Wholesale, PBM) (on the loss of AWP pricing, and risks of PBM disintermediation); Device Innovators; Medical Equipment (health capital spending will favor information technology in the near term); Diagnostic Labs; and Research Tools / Services (implied revenue growth exceeds R&D spending growth)
For more detail, please see The SSR Healthcare Quarterly, published June 26, 2013
For our full research notes, please visit our published research site.