The Pro-Cyclical US Healthcare Thesis – Impact of ROW Economic Risks

Richard

US healthcare demand growth is slow for cyclical reasons; this implies an acceleration of US healthcare demand as the broader economy improves; we recommend hospitals (e.g. HCA, UHS, THC), HMOs (e.g. UNH, WLP), and non-Rx consumables (e.g. BAX, BDX, COV) as pro-cyclical bets

Hospitals and HMOs obviously are US-focused; however non-Rx consumables generally are multinationals with exposure to export market risks, forcing the question of whether ex-US (especially EU) economic risks outweigh pro-cyclical upside in the US

We show that: 1) ROW healthcare demand is less elastic than in the US; 2) that the components of ROW demand (volume, price, mix) appear to maintain their relative proportions in upturns and downturns (in contrast, US healthcare demand elasticity is almost entirely a matter of falling per-capita ‘unit’ demand); and, 3) that changes in ROW prices (during downturns) fall disproportionately on high-tech medical imports

Thus non-Rx consumables companies face less demand cyclicality from ROW than US sales (ROW is generally less than 50% of sales; and, healthcare demand elasticity is considerably lower ROW than in the US); and, non-Rx consumables face less risk from an ROW economic downturn than their higher-tech multinational healthcare peers (who are disproportionately subject to falling export prices)

Despite recent outperformance we see further upside to hospitals, who remain well below their pre-2008 PE-forwards (relative to cap wtd healthcare); this implies hospitals ultimately could see further outperformance even if ACA were overturned

We suspect HMOs will underperform as the market prices in increased utilization, though we’re convinced HMOs in fact gain earnings power as the economy improves, and so view weakness as an opportunity to buy. We recommend holding both hospitals and HMOs across the Supreme Court decision on ACA, as the market seems to believe that what (in the context of ACA decisions) is good for HMOs is bad for hospitals, and vice versa

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