SSR Index of Current-Quarter Healthcare Demand Growth: Inputs Delayed by Shutdown; Early Read Indicates Strong Flu Season

Richard

Among the “not exempt” services that were on hiatus during the 16 day federal government shutdown were data publications from the Bureau of Labor Statistics (BLS), Bureau of Economic Analysis (BEA) and the Centers for Disease Control (CDC)

BLS did not update its website after September 30 and did not collect or publish any data during the shutdown. This includes indicators such as CPI, PPI, unemployment rates and industry-level employment indices. Likewise, CDC announced that it would not be publishing the weekly FluView influenza surveillance report during the shutdown, nor would it be routinely analyzing specimens for tracking purposes. BEA went one step further and its website – including access to archived data – was completely shuttered

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BLS resumed publishing this week with the Employment Situation originally due 10/4 released on 10/22, and PPI/CPI reports set to issue next Tuesday and Wednesday (originally due 10/11 and 10/16). The full revised scheduled for the rest of the year has not yet been released, but it appears BLS anticipates reducing delays to about a week by next month. Routine Friday publication of the CDC’s FluView report also returns this week. BEA has not yet confirmed a revised calendar

The monthly projection of current quarter healthcare services demand that we publish depends critically on the availability of up-to-date observations of things like hours worked in healthcare settings, prices for various services, and broader employment dynamics. Without that data, we are unable to finalize our 3Q13 forecast for October

As of September, we expected 3.6% (nominal) y/y growth in US health services demand during 3Q13, the product of 2.1% growth in unit demand, and 1.4% price growth. The 2.1% unit growth forecast is a 30bp retreat from our initial 3Q13 estimate; the revision was driven in large part by a stalling, during the quarter, of growth for hours worked in healthcare settings

Independent of our quarterly growth rate models, we handicapped the odds of a trend break, i.e. a significant acceleration or deceleration in demand. The trend-break model suggested that acceleration in demand during 3Q13 is only slightly more likely than not (61%)

The flu season is a key driver of unit demand growth during the fourth and first quarters, with the typical season beginning in late September / early October. Though the lapse in federal funding interrupted the issuance of the primary flu tracking tool –CDC’s FluView weekly surveillance report – we continue to monitor influenza activity

In the absence of FluView, we utilized Google Flu Trends – which aggregates search data to estimate influenza-like illness in the U.S. and individual states with algorithms that have historically been extremely accurate. Results through October 20, 2013 suggest one of the more severe early seasons of the last decade  – lagging only 2012 (a particularly severe flu season) and 2009’s pandemic in terms of severity at comparable points in the season

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); Medicaid HMOs (like WCG and MOH); Health IT; and select Dental names (particularly 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); PBMs (especially ESRX), Drug Retail (especially CVS), and Drug Wholesale (especially ABC) (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.
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