Overlooked opportunities in mid-caps
I’m sure most people have heard of middle child syndrome – some have no doubt experienced it...
On 1 January this year, Obamacare came into effect and, with it, the potential to bring more than 20 million people into the US healthcare system. At the time, I asked a number of healthcare specialist managers, and more generalist US equity managers, if they thought Obamacare would be the ‘cure-all’ for the sector.
Those I asked were quite optimistic. The general consensus was that demand for healthcare goods and services would increase, benefiting a number of industries within the sector. For example, the hospital industry would likely see a reduction in the number of uninsured patients, who are currently treated by hospital emergency rooms for free and accounted for as bad debts, as well as higher procedure volumes. The distributors should also benefit from increased use of prescription pharmaceuticals, both generic and branded medications.
Six months on, I asked the same managers if Obamacare has been as positive for the sector as they hoped.
Nick Ford, co-manager of Miton US Opportunities, said: ”
So far, nine million people have enrolled in Healthcare Insurance Exchanges, so from the perspective of increasing healthcare insurance coverage, Obamacare gets the thumbs up. But there have also been some negative, unforeseen consequences too, notably the fact that some employers elected to stop providing healthcare coverage for employees because it was cheaper to accept a fine and allow employees to buy healthcare coverage on private exchanges. While some employees were able to find good deals this way, others were worse off, so from their point of view, Obamacare has been regrettable.
“From investors’ perspective, we should start to see more operations at hospitals, with better reimbursement, but we will not know for sure until healthcare providers report earnings next month. This is because many people delayed enrolling into the new plans until close to the cut off date, which was the end of April. Healthcare stocks have generally had a good run over the past year and the benefits of Obamacare look largely priced in to us.”
Dr Dan Mahony, co-manager, Polar Capital Global Healthcare Growth and Income PLC and Polar Capital Healthcare Opportunities added:
“The feedback from hospital companies suggests that there has already been a significant improvement in patient volumes (they say April numbers were better than March and May numbers better than April, so it’s a positive trend). Companies supplying services or products to hospitals have also benefited and these types of stocks have performed well.
“Obamacare isn’t the only theme in the sector though. Another big driver of the sector is demographics – the challenge of our age will be to provide better healthcare to more people.
“In addition, there is a huge amount of M&A taking place. When it comes to increasing the efficiency of healthcare systems there are two types of company: innovators who are developing new drugs and devices, and consolidators who are trying to gain market share, and with it, economies of scale. The innovation is accelerating and the big companies are getting bigger.”
Dan Harlow, fund manager of AXA Framlington American Growth agrees:
“It is still very early in the new era of Obamacare to draw too many conclusions as to outcomes, but we continue to be optimistic that several industries within the sector will see a positive inflection in demand growth over the coming years.
“To date, perhaps the most tangible impact of Obamacare is its contribution to a pick-up in consolidation in the medical devices industry. In the past two months we have seen Zimmer announce a takeover of Biomet and Medtronic acquire Covidien for $13bn and $43bn respectively. With government, insurers and healthcare providers all looking to increase efficiency as millions more are brought into the US health system, med tech names are looking for greater scale and product breadth in order to remain competitive.”
So it’s early days yet, but in terms of specific sector ideas, it remains one of my favourites for the long term.
The healthcare reform in the US is a big story and has further to play out. Consumers are actually being penalised (via taxes) for not enrolling, so I expect the numbers of those enrolling to continue to increase.
For me, however, the real excitement is around new treatments such as immune-oncology. In the future we are more likely to die with a chronic disease rather than of a chronic disease. Companies making these sorts of breakthroughs, such as Astra, Roche, Novartis and the like, could really benefit.
Other Elite Rated US equity and healthcare-related funds: