SSR Index of Current-Quarter Demand Growth: Initial 3Q12 Estimates

We expect 3.8% y/y health services demand growth during 3Q12, the product of 2.0% growth in unit demand and 1.8% growth in pricing

Unit demand growth is decelerating, presumably as the result of weakened jobs growth, whose primary impact on healthcare demand is to reduce the number of households gaining employer-sponsored insurance

The immediate outlook for jobs growth is weak, and the full effect of job formation on health demand growth is lagged (+/- 14 months), thus 3Q12 is very unlikely (+/- 2% probability) to see health services unit demand accelerate

Volume-sensitive healthcare sub-sectors (e.g. Hospitals, Non-Rx Consumables) carry estimates and valuations that imply long-term secular weakness in unit demand, where we see eventual cyclical gains – a 1 percent gain in the employment rate (adjusted for labor force participation) translates to a 70bp gain in per-capita unit demand

The obvious problem with our thesis is that such cyclical gains are very unlikely in the immediate term, thus our recommendation to tilt healthcare portfolios in a pro-US / pro-cyclical manner represents a value investment driven by a catalyst that’s simple to identify (jobs growth) but nearly impossible to time

We stay with the pro-US / pro-cyclical tilt only because the alternative (innovators with heavy reliance on product flow, pricing power, and export markets) is even less appealing; EU economic risks translate directly into pricing risks for the innovators with export market exposure

The logical conclusion is a bar-belled approach – volume-levered names on the one hand, and a focused portfolio of innovators with improving product mix (new product flow being a more reliable source of upside than pricing power) on the other