© 2009 Morningstar, Inc. All rights reserved. Healthcare Industry Dynamics Damien Conover, CFA...
-
Upload
alfred-baldwin -
Category
Documents
-
view
214 -
download
0
Transcript of © 2009 Morningstar, Inc. All rights reserved. Healthcare Industry Dynamics Damien Conover, CFA...
<#>
© 2009 Morningstar, Inc. All rights reserved.
Healthcare Industry Dynamics
Damien Conover, CFA Equity Strategist and Healthcare Observer Editor [email protected](312) 696-6052
2
Background: Damien Conover, CFA
Morningstar Healthcare Analyst and Strategist× Covered the healthcare industry for over eight years× Primary focus on pharmaceutical and biotechnology industries
Editor of the Healthcare Observer× In-depth analysis of complex healthcare issues × Cross-industry investment ideas in healthcare
Recognized Authority in Healthcare Investing× Regular media appearances discussing healthcare stocks× Appearing on CNBC, CNN and Bloomberg TV
3
Executive Summary
Healthcare Reform Overview× Several proposed healthcare plans are surfacing with broad
implications.× We expect new reform will only slightly impact Big Pharma’s
valuations.
Economic Environment/M&A Activity× Healthcare spending tends to hold up regardless of economic
cycle.× Several biotech companies look like acquisition targets for Big
Pharma.
Recommended Healthcare Stocks× Top Big Pharma picks include Novartis, Merck, Johnson &
Johnson and Abbott.× Medical devices are our top ranked industry. × Healthcare Focus List is outperforming our benchmark.
4
Healthcare Reform: Will Major Change Happen?
U.S. Healthcare Spending Sustainable?
× U.S. healthcare spending is 72% higher than OECD average
× CMS projects healthcare spending will represent 18% of GDP in 2009, rising to 20% in 2018. (not including economic stimulus or healthcare expansion)
Better U.S. Healthcare?× Trails Modern World (Ranks
37th in WHO in quality and fairness)
U.S. record is more on par if we remove homicides, transportation accidents and adjust for obesity
Healthcare Spending (% of GDP)
OECD Countries
0% 5% 10% 15% 20% 25%
TurkeyPoland
KoreaMexico
Czech RepublicLuxembourg
Slovak RepublicIrelandJapan
FinlandHungary
UKSpain
NorwayAustralia
OECDItaly
IcelandGreece
SwedenNew ZealandNetherlands
DenmarkCanadaAustria
PortugalBelgium
GermanyFrance
SwitzerlandUSA
2006
2009
2018
U.S. uninsured*
Source: CRS Report for Congress, 2007/updated 2008 and Morningstar.
5
Healthcare Reform: Will Major Change Happen?
× GAAP accounting (off-balance sheet) suggests stress on U.S. healthcare spending
Source: U.S. Treasury, CMS and Morningstar.
6
Healthcare Reform: Will Major Change Happen?
History of Political Resistance× 1930s: despite the success of the New Deal, President
Roosevelt declines universal healthcare attempt, fearing its inclusion in Social Security Act would derail the entire project
× 1948: President Truman unveils single payer plan: American Medical Association succeeds in helping defeat it despite 75% public support
× 1960s: President Johnson attempts to further late President Kennedy’s healthcare goals, ultimately signs Medicare/Medicaid Bill in 1965
× 1970s: President Nixon explores universal healthcare with help from Senator E. Kennedy, efforts (and Watergate) ultimately produce no reform
× 1993: President Clinton's 1,300 page healthcare plan fails to come to a vote in House and Senate
7
Healthcare Reform: The Five Committees
Senate Health, Education, Labor and Pensions (HELP) Committee – Late Sen. Ted Kennedy (D) (Mass.)– Sen. Chris Dodd (D) (Conn.) – Sen. Tom Harkin (D) (Iowa)
Affordable Health Choices Act: × Includes public plan× Reduces uninsured to 13% by 2019 from the current 19%
(Share of Non-elderly)× Community Rating and Guaranteed Issue× Mandates coverage (Forces most firms to provide insurance or
pay penalty)× Incentivizes coverage through subsidies (150%-400% of
poverty level) and penalties× Costs $600 billion over next ten years (Lacks new funding
source)× Odds of Passing: Low (in current form)
8
Healthcare Reform: The Five Committees
House Ways and Means, Education and Labor and Energy & Commerce Committees
America’s Affordable Health Choices Act:× Includes public plan × Reduces uninsured to 6% by 2019 from the current 19%
(Share of Non-elderly)× Community Rating and Guaranteed Issue× Mandates coverage (Forces most firms to provide insurance or
pay penalty)× Expands Medicaid eligibility (11M new people: 10M not
covered, 1M from private)× Costs over $1 trillion over the next ten years
Funding: $800 billion raised by Medicare cuts ($220B) and taxes ($580B)
× Odds of Passing: Medium to Low (in current form)
9
Healthcare Reform: The Five Committees
Senate Finance Committee– Max Baucus (D) (Montana)– Bipartisan Committee
America’s Healthy Future Act:× No public plan, Co-ops instead× Reduces uninsured to 9% by 2019 from the current 19%
(Share of Non-elderly)× Levies on insurers and other healthcare industry (Annual fees,
lower reimbursement)× Modified Community Rating and Guaranteed Issue× Modified mandated coverage (Forces most firms to pay fees
for employees tax credits)× Create an insurance exchange × Subsides for insurance up to 300% of the poverty level× Costs $774 billion over the next ten years
Funding: $825 billion by excise tax ($215B) and Medicare/Medicaid cuts ($409B)
× Odds of Passing: Medium to High
10
Healthcare Reform: What Does Reform Mean for Healthcare?Increased Insurance Coverage × Reduce the number of uninsured through multiplayer
approach× Community Rating and Guaranteed Issue× Mandates coverage (Forces most firms to provide
insurance or pay penalty)× Expand coverage for children and Medicaid eligibility
Lower Drug Prices× Increased Medicare price negotiation× Increased Medicaid price negotiation× Comparative and cost effectiveness programs
Increased Investment in Healthcare Information Technology
11
Potential Sector Reactions to Healthcare Reform
Managed Care× New government plan will increase insurance usage By 2016, 16 to 35 million more people covered
× Most likely stay with employer convergeHurdles to switching from employer sponsored plan:
• 30% tax subsidy for employer health insurance• Firms still likely to provide insurance as workers likely demand higher
wages without insurance• Firms’ penalty for not paying insurance is close to cost of paying
insurance (adjusted for taxes)• Larger firms tend to prefer in-house coverage, partly due to the low
administrative costs
Public vs. Private CoverageCBO: 6 million people go to public planLewin Group: 100 million people go to public plan
× Most likely outcome: Co-ops →minor switching away from private coverageNew Fees: $6 billion annually for the health insurance group
12
Potential Sector Reactions to Healthcare Reform
Pharmaceuticals and Biotech× A lot of negative headline risk in 2009: Opportunity for
investing
× $80 Billion Deal over the next ten years $30 billion for offering a 50% discount for drugs in the Medicare Part D gap $50 billion for reforms (Dual eligibles: $47B, Medicaid rebate from 15.1% to 22%: $18.3B, Fees: $2.3B)
× Comparative Effectiveness Slow long term impact, CBO only .01% reduction in health-care
spending
× Proposals Largely off the table Allow drug re-importation: CBO only 1% reduction in drug spending Follow On Biologics: Several years away and less impactful than
traditional generic competition
× Bottom line: volume benefits outweigh lost pricing power in the near term
13
Potential Sector Reactions to Healthcare Reform
Generics× Expanded insurance population should increase
utilization of the low cost drugs× Medicare Part D Analogy
Hospitals× Hospitals are required by law to treat patients and fewer
uninsured patients decreases bad debt expense× However, unlikely government lets hospital gain much
higher margins
Devices× Higher patient volumes largely offset by revenue mix
and pricing pressures
14
Potential Sector Reactions to Healthcare Reform
Healthcare Information Technology× Strong Political Support
× Changes likely to be evolutionary, not revolutionary
Source: Morningstar.
15
Reform Scenario: Drugs Industry Case Studies PFE, LLY, MRK
× Conservative approach – the entire uninsured population receives Medicaid pricing
× No reactionary cost cuts implemented
× Innovation does not suffer – i.e. R&D expenditures stay at close to current levels
× No scale savings are realized from increased volume
× Conclusion – only under the most severe scenario are our FVEs “crushed”
% of Drug Spending
Current Discount
Price Cut Under National Plan
Medicaid 15% -30% 0%
Medicare 21% -15% -15%
Private 59% -10% -20%
Out of Pocket 5% -30% 0%
% ChangeU.S. Impact Volume Price Sales COGS SG&A R&D
0% -3% -3% 1% 0% 0%Total Firm Impact Volume Price Sales COGS SG&A R&D Fair Values
0% -2% -2% 1% 0% 0% -5%
% ChangeU.S. Impact Volume Price Sales COGS SG&A R&D
15% -7% 7% 2% 0% 0%Total Impact Volume Price Sales COGS SG&A R&D Fair Values
8% -4% 4% 1% 0% 0% 0%
% ChangeU.S. Impact Volume Price Sales COGS SG&A R&D
15% -15% -3% 4% 0% 0%Total Impact Volume Price Sales COGS SG&A R&D Fair Values
8% -8% -2% 2% 0% 0% -10%
% ChangeU.S. Impact Volume Price Sales COGS SG&A R&D
15% -30% -20% 9% 6% 3%Total Impact Volume Price Sales COGS SG&A R&D Fair Values
8% -15% -10% 4% 3% 2% -38%
Negotiated Medicare Prices
Increased Insurance and Negotiated Medicare Prices
National Plan (All U.S. Sectors get 30% discount)
National Plan (U.S. at Medicaid Prices)
% Change Basis Point Change in Margin
Basis Point Change in Margin% Change
% Change Basis Point Change in Margin
% Change Basis Point Change in Margin
Source: Morningstar.
Source: CMS, Congressional Reports and Morningstar.
16
Implications of Credit Crisis
Credit Crisis leading world economies to recession
Where to Invest?
× Traditional Defensive Areas: Healthcare and Consumer Staples
× Traditional Growth Areas: Technology, Financials, Healthcare
Defense + Growth = Healthcare
Healthcare Recession Resistant
× Limited Correlation between GDP and Healthcare
× Healthcare Spending Never Turned Negative
(even in prolonged recessions of 1970s & 80s)
× Major Gaps in GDP and Healthcare Spending
in Past Three Recessions
17
Why Does Healthcare Hold Up?
× Basic Need
× Government and Employer Health Insurance
× Supplier-Induced Demand
18
Credit Crisis: 2009 to be the Year of Mergers and AcquisitionsAcquisitions: Large Cap Firms Step Up
× Venture Capital is shut and public financing is too dilutive
× Big Pharma needs growth and has cash
× Expect many small cap plays
× Mid Cap Targets: Amylin (FV: $15), OSI Pharma (FV: $45), Onyx (FV: $32), BioMarin (FV: $30), Regeneron (FV: $22), Vertex (FV: $35), Elan (FV: $13), Crucell (FV: $23)
Mergers: Cost Cutting
× Big firms are cutting costs to grow bottom line
× Cuts can be deeper through consolidation ($3.5B for MRK, $4B for PFE)
× Problem: Exacerbates patent cliff in most cases× Large Cap Targets: Schering-Plough* (FV: $37), Biogen Idec (FV:
$65), Celgene (FV: $54), Genzyme (FV: $82), Wyeth** (FV: $59) *Merck announced the acquisition of Schering on Mar. 9th **Pfizer announced the acquisition of Wyeth on Jan. 26th
19
Credit Crisis: Top Biotech Takeout Targets
Source: Morningstar M&A Report
20
Stock Outlook: Top Pharmaceutical Recommendations
Stock Moat Price/FV Star RatingUncertainty Mkt Cap
Novartis (NVS) Wide .62 Low $109B
Rationale: Diversified drug platform (branded, generic, consumer, vaccine) Generics should improve in ‘10
Blockbuster launches in drugs and vaccines: FTY720, ACZ885, Menveo/Men B
Strong inline product group focused on oncology (Tekturna becoming a blockbuster)
Merck (MRK) Wide .71 Medium $68B
Rationale: Good price on Schering acquisition (we expect JNJ to modestly renegotiate RA deal)
Get Schering’s pipeline (TRA, Golimumab, Asenapine, Boceprevir)/ cost synergies ($3.5B ‘12)
Johnson & Johnson (JNJ) Wide .76 Low $167B
Rationale: Diversification protects the company from patent losesLeading pipeline: Rivaroxaban, Telaprevir, Golimumab, CNTO 1275Most negatives behind the company: Epo, DES, Risperdal (Watch
out for Concerta in ‘10)
Abbott Laboratories (ABT) Wide .67 Low $72B
Rationale: Strong inline products: Humira, Trilipix, Xience and modest patent exposure
Strong acquisition track record (Kos, Knoll, and likely AMO)
21
Sector Outlook: Top Sectors by Star Rating
Source: Morningstar
22
Stock Outlook: Healthcare Focus List
Source: Morningstar
Source: Morningstar
Health-care Focus List Performance Since Inception
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
Focus List Health-care Index (IYH) S&P 500
Company Ticker Moat Risk Price to Fair Value Star Rating AnalystWellPoint WLP Narrow Medium 0.58 CoffinaZimmer ZMH Wide Medium 0.60 StralowCovidien COV Narrow Medium 0.62 MorozovThermo Fisher Scientific TMO Narrow Medium 0.62 MorozovNovartis NVS Wide Low 0.62 ConoverBoston Scientific BSX Wide Medium 0.63 WangGenzyme GENZ Wide Medium 0.65 AndersenAbbott Laboratories ABT Wide Low 0.67 ConoverVCA Antech WOOF Narrow Medium 0.74 WangAmerisourceBergen ABC Narrow Medium 0.81 Coffina
23
Morningstar Healthcare Team
Alex Morozov, CFA Medical Instruments312-696-6159
Karen Andersen Biotechnology 312-384-4826Julie Stralow, CFA Devices/Orthopedics 312-696-
6278Debbie Wang Devices/CRM 312-384-
3937Bill Buhr Healthcare Services 312-696-
6042Matthew Coffina Managed Care/Distributors 312-696-
6864Patrick Dunn Healthcare IT 312-384-
3767Brian Laegeler, CPA Generic Drugs 312-384-
4825Lauren Migliore Biotech/Specialty Pharma 312-244-
7048
24
Questions?Where to find more information?
Healthcare Observer: http://healthcare.morningstar.com/
Additional Information: www.morningstar.com/goto/health11
Upcoming Issues:
Outlook for Obesity Treatments
New Devices and Drugs for Atrial Fibrillation
Past Issues:
Upcoming Breakthroughs in Cancer Drugs
The Impact of Healthcare Reform on Stocks
Dynamics of Drug Eluting Stents
Strong Trends in Contract Research Organizations
2009 Outlook for M&A
Profits in New Advancements in Ophthalmology
Next Wave of Healthcare Information Technology