S&P equity analysts examine the ramifications for the industry of potential policy moves by the new Administration
From Standard & Poor's Equity ResearchWhile we believe more pressing general economic issues will take precedence, we still think health-care reform will be a key priority in the Obama Administration. With Democrats now in control of both the White House and Congress, we believe they now have the opportunity to pass meaningful reform legislation to provide health-care insurance coverage for some 46 million uninsured Americans (15% of the total population).
The new coverage, funded to a large extent by the federal government (which most experts estimate will cost between $120 billion and $150 billion, depending upon the scope of the package), would likely expand access to health care and increase revenues for providers of medical products and services, including pharmaceutical companies.
However, the Obama program also calls for significant cost reductions, which we believe would adversely affect the branded pharmaceutical industry in terms of both discounted pricing and contracted use of branded drugs.
Change in Medicare Part D Coming
The key issue, in our opinion, is the planned elimination of the noninterference clause in the Medicare Part D prescription drug program, which funds drug coverage for some 44 million elderly Americans. Under the present system, the government is prohibited from engaging in Medicare drug pricing negotiations with pharmaceutical manufacturers. Negotiations are handled strictly by private-sector managed care and pharmacy benefit management firms.
President-Elect Obama and congressional Democrats favor changing the program to allow or possibly require direct government negotiations with drug manufacturers, which is expected to sharply lower the program's cost. Another likely money-saving tactic will be greater use of inexpensive generics through new incentives.
We have "strong buy" recommendations on Abbott Laboratories (ABT) and Johnson & Johnson (JNJ). We think these companies are well-positioned in growing pharmaceutical, device, and consumer health-care markets. In the domestic pure play pharma segment, we have buys on Bristol-Myers (BMY) and Schering-Plough (SGP). Our recommendations in the generic space are Teva Pharmaceutical Industries (TEVA) and Watson Pharmaceuticals (WPI).
We have a generally favorable outlook for the biotech sector under the Obama presidency. We see increased funding for the Food & Drug Administration and National Institutes of Health, which should help the FDA stay current on science-related research and approve new drugs on schedule, and allow the NIH to conduct clinical studies and promote innovative research through new grants. In addition, we expect an Obama Administration to support the advancement of embryonic stem-cell research, which may open new avenues to treat serious diseases.
On the negative side, we think Obama will be a staunch supporter of implementing a new regulatory pathway for generic drugs. Competition from generic biotech drugs would put pressure on drug pricing, and lower returns that we believe are necessary for firms to recoup investments and to support pharmaceutical and biotechnology innovation.
We have strong buy recommendations on Genzyme (GENZ) and Celgene (CELG). We expect Genzyme to achieve its 20% annual earnings growth strategy and invest in new alliances for late-stage clinical assets, and see multiple new drug approvals/label expansions for existing products in 2009. In our view, Celgene has the best earnings growth prospects among large-cap industry leaders.
We believe Obama's policies will have a positive impact on stem-cell research and genetics/personalized medicine. We believe Obama will overturn Bush's ban on federally funded embryonic stem-cell research. (Currently there are several state-funded programs, including California and New Jersey.) Companies we believe will benefit from this change include Invitrogen, as it has numerous stem-cell research products.
Obama has also stated his support for genetics research and technology advancements, which could benefit companies such as Illumina (ILMN) and Affymetrix (AFFX). Overall, we believe Obama's impact on the life sciences industry will be positive, as he has stated he would double basic research budgets within 10 years. Numerous life science companies sell their products to government and academic research facilities and should benefit from a larger research budget.
We view Obama's proposal for a new health insurance plan for individuals who do not qualify for Medicaid and are not covered by an employer-sponsored plan as a net positive for the managed health-care industry. Managed care organizations already rely on government-funded markets such as Medicare and Medicaid for enrollment expansion. The large size of the uninsured population presents enrollment growth prospects for managed care organizations, which are seeing limited enrollment expansion opportunities in the commercial market.
Nonetheless, given rising medical costs and the likely restrictive government reimbursement policy we see (owing to budget deficits and other programs requiring huge investments), we believe that profitability may be limited and earnings growth would be dependent on enrollment growth. We think the largest managed care organizations, such as UnitedHealth Group (UNH) and WellPoint (WLP), have the size and economies of scale to help control medical costs and, therefore, profit more from such a program.
Given Obama's support of e-prescribing, increased generic utilization, and an approval pathway for biogenerics, as well as increased health insurance enrollment, we believe pharmacy benefit managers, including Express Scripts (ESRX) and Medco Health Solutions (MHS) and the large drug distributors, including AmerisourceBergen (ABC), Cardinal Health (CAH), and McKesson (MCK), are poised to increase profitability.
Although universal health-care legislation is generally considered to be favorable for health-care facilities providers due to its potential to reduce the costs associated with bad debts and uncompensated care, S&P believes that caution and selectivity is warranted.
We anticipate that the potential for passage of meaningful health-care reform legislation will be a function of both the political desire to do it and the government's ability to incur the budgetary expenditures needed to finance reform following the $700 billion already spent on the financial bailout package.
We think the best-positioned companies are those that stand to benefit from reform and the fundamental trends underlying reform that are increasingly being implemented by third-party payors, such as outsourcing of care and maximizing the purchasing potential of the health-care dollar by employing the most efficient provider of services.
We recommend companies that provide outsourced psychiatric facilities, such as Psychiatric Solutions (PSYS), and outsourced surgery centers, such as AmSurg (AMSG). In addition, we favor long-term acute care hospital and nursing home providers that provide services at significantly lower costs than acute care facilities, such as Kindred Healthcare (KND) and Sun Healthcare Group (SUNH).
Business Exchange related topics:
Obama's Economic Policy
U.S. Healthcare System
Health Insurance Reform