With the health-care reform bill being reconciled in congressional committee, now is the time to think about which companies to buy and take advantage of the changes coming down the pipe. I asked three of our analysts which industries will win and what some of their favorite ideas are right now.
Which industries are winners and which are losers thanks to this reform?
Brian Orelli: As I see it, almost everyone is a loser. Sticking with the status quo of ever-increasing prices would have been a total win for health-care companies. Of course that isn't really sustainable.
The industry that lost the least? Probably drug companies like Pfizer
Generic-drug companies also scored a big win since they'll finally be able to sell knock-offs of biotech drugs. Brand-name drugs will get at least 12 years of exclusivity, but I don't see that as a major problem since patents on drugs often extend beyond that timeframe anyway.
Bryan White: Health-care providers such as hospitals and long-term care facilities will get hit the hardest by reform legislation. In the recently approved Senate bill, Medicare cuts are a major source of funding for the nearly $900 billion overhaul.
The providers that depend on Medicare reimbursements for a substantial part of their revenue will face payment rate cuts which will likely outweigh an eventual increase in our insured population.
A cloud still hovers over the health insurers, but I think the largest three insurers with scale will fare best -- UnitedHealth
My favorite industries within the health-care space are health-care IT, medical devices and equipment, and pharmacy benefit managers (PBMs). While most of the upside is priced-in with the PBMs and IT companies, investors can still find bargains in the medical device industry.
Michael Olsen: By my measure, the industry that most clearly wins is medical and scientific devices. The equation's simple: They'll benefit from increased volumes, and the tax burden -- $2 billion initially, increasing to $3 billion, on a market share basis -- isn't particularly onerous for larger players. More specifically, those possessing economies of scale, R&D efficiencies, and incumbent technologies will (most likely) emerge stronger if measures resembling the Senate bill pass.
The losers today are those of yesteryear: hospitals. They're the playground runt. Historically at the mercy of insurers, Medicaid, and Medicare, the game's not too likely to change. There's some upside: Mandatory care by 2014 should reduce bad debt expenses in emergency rooms. But reduced Medicare reimbursements and Medicaid's expansion are unlikely to do much good.
What companies are catching your eye today?
Brian Orelli: With the intense focus on cutting costs, you need to look for companies with two types of drugs: those treating life-threatening diseases where there may be less pricing pressure and those with drugs that work considerably better than the current offerings. The latter is important because cheap generics may get used over more expensive follow-up drugs with only slightly better efficacy.
For life-threatening diseases there are plenty of development-stage drugmakers testing cancer treatments, like Dendreon
In the wildly better category, I'd choose Vertex Pharmaceuticals. In clinical trials so far, its hepatitis C treatment, telaprevir, has successfully treated patients that weren't cured with current offerings from Roche or Merck. Vertex doesn't look particularly cheap, but high-growth stocks rarely do.
Bryan White: The health-care sector has had a nice run of late, but I think we can still identify attractive investments in this space. Genzyme
Medical device maker Stryker
Michael Olsen: Little surprise that my winners fit the mold of my industry favs: Medical device companies with economies of scale, R&D efficiencies, and incumbent positions. They're picks and shovels plays, with strong histories of innovation and fabulous recurring revenue streams.
The suspense is killing you? Becton Dickinson, my pick for Stocks 2010, and Thermo Fischer Scientific. These companies are at the heart of the medical supply chain, providing the nitty gritty necessities.
Their product bins are similar, as well. They range from the very simple -- scalpels, needles, and beakers -- to the complex, such as diagnostic tools used in detection and development of drugs. One thing's relatively certain, though: Demand for their wares. Where there's medicine, expect to find them.
Those are our ideas. Share some of your own in the comments box below.
This roundtable article was compiled by Jim Mueller who does not own shares of any of the mentioned companies. Pfizer, Stryker, UnitedHealth Group, and WellPoint are Motley Fool Inside Value recommendations. Exelixis and Vertex Pharmaceuticals are Rule Breakers selections. UnitedHealth Group is a Stock Advisor pick. Novartis is a Global Gains recommendation. The Fool owns shares of Exelixis, Stryker, and UnitedHealth Group. The Fool is all about investors writing for investors.