Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Healthcare Company Profits Sensitivity to Obamacare

Companies / Healthcare Sector Oct 31, 2009 - 02:17 PM GMT

By: Richard_Shaw

Companies

Best Financial Markets Analysis ArticleNational healthcare wherever is implemented squeezes prices and profits of the private businesses involved in the system.

Obamacare in the U.S. will be no different.  For investors in healthcare companies, it is a good idea to begin to think through which companies will be most severely negatively impacted or least impacted, to potentially make  deletions or substitutions.


One dimension of healthcare companies is research and development, which has been an important driver of future growth and value for many companies in the biotech, pharmaceutical and medical devices industries.

To the extent that the rewards of research and development are reduced by price pressures due to national healthcare, research and development will decrease, and therefore growth in sales, profits and value of those private companies will slow.

One way to begin the process of determining the sensitivity of biotech, pharmaceutical and medical device companies to a switch from a private to a public U.S. healthcare system is to identify what portion of their total revenue comes from the U.S.  Those with a greater U.S. revenue exposure are more likely to be damaged by Obamacare than those with less U.S. revenue exposure.

This chart identifies 21 healthcare companies that have expended for R&D on average for the past 7 years at 15% of sales or more, and that have a current market-cap of $10 billion or more.

Company symbols in the table image: STJ, AMGN, CELG, AGN, BMY, BSX, MRK, LLY, GILD, BIIB, JNJ, GENZ, WYE, ESALY, NVS, GSK, AZN, PFE, RHHBY, NVO, SNY, SGP.

While there are many other questions to ask about a company to judge its sensitivity to potential U.S. national healthcare, looking at geographic revenue segmentation is a good place to start.

Some, but not all, of the other factors, you will probably want to analyze as you do your investment research are:

  • current profit margins on U.S. revenue versus non-U.S. revenue
  • split of consumer products that are not covered by current insurance, nor likely to be covered by Obamacare (e.g. aspirin and cold remedies)
  • sales and growth rate contribution from the U.S. versus other countries
  • what they have already in late state development or clinical trials
  • the duration of patents on their key drugs or devices
  • the current degree of market adoption of their key drugs or devices

While the answers to the above questions could prove more important than geographic revenue segmentation, preliminary logic would say that large companies with lower U.S. revenue exposure are candidates as potential substitutes for large companies with higher U.S. revenue exposure.

Even though companies with less U.S. revenue may have substantial European revenue, the national healthcare impact from those countries is already a known.

One of our clients who is in the medical services business, told us that a national healthcare official there told him that European healthcare officials recognize that the profitable private market in the U.S. has enabled much of the research and development by healthcare companies around the world.  He said the flow of new drugs, treatments and devices that they rely upon is dependent on companies being able to profitably develop them for the U.S. market.  European officials are concerned that their national healthcare will consequently suffer a decreased flow of new drugs, treatments and devices if the U.S. eliminates its private healthcare system.

Whether that is correct, we don’t know, but it is an interesting issue from an investment perspective.  It suggests that even though there are important European companies doing research and development, they may not do so much of that if they cannot sell new products into the United States at higher prices than they can at home.

The story points to the need for a large private healthcare market somewhere to make development of new medical technology economically attractive to private companies.

Without private research and development, we are left with politically directed research which is more likely to be incremental as opposed to breakthrough. There certainly are some examples of government directed and funded research creating breakthroughs, most notably in space exploration and in military technology.  However, those types of programs were not characterized by cost containment as a key objective, but cost containment is one of the key goals in any national healthcare system.

All this leads us to think that healthcare investing would need to refocus on the “Walmarts” of healthcare (high volume, low margin); that biotech venture capital would have to be rethought; and that large pharma and device companies may need to merge to create larger more efficient, but less research oriented entities.

There will still be success stories and investment profits to be made, but not with the same old investment selection models.

We aren’t entirely sure what the new models would look like, but we do think a re-think of what a good healthcare investment would be is essential.

For starters, the U.S. versus non-U.S. revenue mix is a dimension to consider.

Approach healthcare providers, biotech companies, pharma companies, medical device companies, and medical or psychiatric REITS with an extra dose of investment research and caution until the U.S. sorts out its healthcare system plans.

Disclosure: We do not own any company identified in this article.

By Richard Shaw 
http://www.qvmgroup.com

Richard Shaw leads the QVM team as President of QVM Group. Richard has extensive investment industry experience including serving on the board of directors of two large investment management companies, including Aberdeen Asset Management (listed London Stock Exchange) and as a charter investor and director of Lending Tree ( download short professional profile ). He provides portfolio design and management services to individual and corporate clients. He also edits the QVM investment blog. His writings are generally republished by SeekingAlpha and Reuters and are linked to sites such as Kiplinger and Yahoo Finance and other sites. He is a 1970 graduate of Dartmouth College.

Copyright 2006-2009 by QVM Group LLC All rights reserved.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Do your own due diligence.

Richard Shaw Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in