by Marc Lichtenfeld, Investment U’s Senior Analyst and Healthcare Expert
Thursday, January 13, 2011: Issue #1427
Editor’s Note: Investment U’s resident healthcare expert, Marc Lichtenfeld, is in San Francisco this week, attending the massive J.P. Morgan Healthcare Conference. Today and tomorrow, he’ll be reporting live from the event, revealing the most important trends in the healthcare sector today – and how investors can play them for serious gains…
Every second week in January, I can’t wait to hop on a plane for the 2,570-odd mile trip from South Florida to San Francisco.
It’s not because I like the cold or fog… it’s simply because the Bay Area is the only place to be at this time of year.
Why? The annual J.P. Morgan Healthcare Conference. There was a palpable buzz in the air as soon as I made my way downtown, as nearly 15,000 company executives, investment bankers, fund managers, analysts, research scientists and investors all descend on the city, trying to get an investment edge, land deals, or tell a story.
And in a telling sign that both the U.S. economy and healthcare sector are improving strongly, attendance at the conference is up 20%. The halls are so packed, they resemble the Los Angeles freeway at rush hour.
Today and tomorrow, I’ll be bringing you my observations live and direct from the conference. The major themes… the companies making noise and garnering attention… the breakthrough trends… updates on important drug trials… and the potential deals that could produce big profits.
So let’s get started…
Three Issues Dominating the Conference
Right off the bat, three big trends are dominating discussions here at the conference. This is where the biggest developments and profits are likely to come from in 2011.
The first big trend is healthcare reform.
If ever there was a phrase that polarized opinions in 2010, this was it.
However, here’s the revealing thing: The healthcare executives and insiders that I’ve spoken to are okay with it. In fact, many were even downright supportive.
The same couldn’t be said for the conference attendees, though…
Why Healthcare Reform is Here to Stay
In her keynote speech on Monday, Nancy-Ann DeParle, Counselor to the President and Director of the White House Office of Health Reform, faced a hostile audience as she laid out the case for reform.
The audience snickered when she pointed to the recent lower unemployment figures as proof that reform isn’t the job killer that many have made it out to be. Although DeParle cited various facts and figures, she probably didn’t convert any opponents.
But the fact that the Affordable Care Act didn’t cause complaint from the CEOs of the companies directly impacted by it is crucial. On the contrary, they seemed to embrace it – and that’s why I believe it’s going to stick.
The Republicans can fight all they want to get it repealed, but mark my words, as long as the industry is in favor of it, reform is here to stay.
I’ve argued in the past that healthcare reform is President Obama’s legacy and he won’t back down. And perhaps most importantly, with the endorsement from the healthcare sector and the huge lobbying dollars it dishes out, members of Congress will revert to form: Listen to the money talk.
It appears that healthcare companies got what they wanted from reform, which is why they’re not complaining about it. Executives would rather deal with the devil they know rather than the unknown.
I expect some companies to emerge as big winners in the new climate of healthcare reform. Which ones?
Two Winners From Healthcare Reform… And One Trying to Sneak Around It
WellPoint (NYSE: WLP), the largest health benefits provider in the United States, is well positioned to handle both the new influx of patients and regulations. Due to reform and the expansion of Medicaid, WellPoint expects to gain 10 million new customers by 2015.
But Molina Health (NYSE: MOH) might end up as the biggest winner. The company is focused exclusively on government-sponsored healthcare for low-income families – right in the sweet spot of what reform is trying to accomplish.
In 2010, the company expects its medical loss ratio (the percentage of revenue spent on healthcare for its customers) to come in at 85.4%, above the 85% mandated threshold.
Conversely, Healthspring (NYSE: HS) sits below 85%. And rather than discuss any efforts to comply with the requirement, management instead discussed accounting tricks to get above it. Watch for the company’s future guidance on February 17… I suspect it won’t be pretty.
One other point on healthcare reform here: As part of the deal that the industry struck with the government, drug companies will pay an excise fee. However, not one executive I saw appeared annoyed about it. I wouldn’t even call it begrudging acceptance. Rather, they were pragmatic and suggested that these fees are simply part of the agreement – one that they’re satisfied with.
For example, Amgen (Nasdaq: AMGN) CEO Kevin Sharer said his company will pay a fee of $150 million to $200 million after tax. But the upside is that reform “protects innovation and sets a framework for follow-on biologics that’s fair.” In other words, in order to protect his company’ patents, he was willing to pay the fee.
And that leads me to another key theme – and the second of the big three trends that will dominate in 2011…
The “Patent Cliff”
The “patent cliff” situation has loomed large now for the past few years. And today, it’s finally here.
Simply put, the concept refers to the number of everyday blockbuster drugs whose patents are about to expire. As I mentioned in last week’s column, this includes Pfizer’s (NYSE: PFE) cholesterol drug, Lipitor and Merck’s (NYSE: MRK) Singulair, which tackles asthma.
The subject has been a constant topic of conversation this week – and it’s one that gives investors an excellent chance to capitalize. Understandably, though, large pharmaceutical companies like Pfizer, Merck and Bristol-Myers Squibb (NYSE: BMY) didn’t want to focus their presentations on the ominous topic.
But the fact remains that generic companies like TEVA Pharmaceuticals (Nasdaq: TEVA) and Impax Laboratories (Nasdaq: IPXL) are set to take advantage of the enormous opportunities that the patent cliff represents – and spent time at the conference discussing how their robust pipelines will facilitate that.
I believe this patent cliff development is so important to the healthcare sector that I’ve prepared a special, in-depth report on the subject. In it, you’ll get the inside track on how you can profit from it. Just go here to get the details.
P.S. Tomorrow, I’ll bring you the second of my live reports from San Francisco, detailing the third major helathcare trend of 2011 – healthcare IT.