SSR Index of Current-Quarter Healthcare Demand Growth: Interim 4Q13 Estimates

Richard

We expect 3.5% (nominal) y/y growth in US health services demand during 4Q13, the product of 2.3% growth in unit demand, and 1.2% price growth. The 2.3% unit growth forecast would be a 30bp improvement over actual 3Q13 growth of  2.0%

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 suggests a very high probability of sequential acceleration in demand during 4Q13 (93%)

Our expectation of modest acceleration is underpinned by slight wage growth for non-supervisory labor in healthcare settings (which we read as a contemporary indicator of health services unit demand), and slight improvement in non-farm employment (which because of its link to the availability of employer-sponsored insurance, we read as a leading indicator of health services demand)

Because of the ‘fiscal cliff’ sequester, national average health services y/y pricing growth has fallen from 1.9% in 1Q13 to 1.3% in 2Q13 and just 1.1% in 3Q13 — the slowest price growth observed in at least 20 years. Our model projects a modest 10bp uptick in 4Q13 pricing growth to 1.2%

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. Through mid-December, the intensity of the current flu season is tracking slightly below average. Because of last year’s severe season, an average 2013/2014 season would imply a +/- 30bps headwind to unit demand during 4Q13-1Q14

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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