Afternoon Review

With an overwhelmingly different look to the U.S. political system, this seems like an appropriate time for me to provide an in depth look at the effects the political landscape will have on different industries. Today, I am starting with healthcare because it is the sector that has the greatest chance of being significantly altered during the next four years (outside of financials of course).

The obvious obstacle to any changes to U.S. healthcare will be budgetary pressures from the government’s involvement in the financial crisis. If there is any time or money left over from dealing with the economy in the next four years, then we can expect to see healthcare reform that favors government solution over private market solutions.

The impact is mostly negative for managed care and health insurers.
Democrats are likely to increase regulation over the managed care industry and make cuts to Medicare Advantage to fund other healthcare priorities such as universal coverage and/or SCHIP (State Children’s Health Insurance Program) expansion. Expanding SCHIP and possibly Medicaid, however, is positive for insurers that run the plans (e.g. UNH, WLP) because they would benefit from subsidies and access to 46 million uninsured Americans. Insurers and managed care would benefit from more pricing power for drugs and medical devices.

The impact on major and specialty pharma is negative.
Democrats support drug reimportation (from Canada or other countries), direct negotiation of Medicare drug pricing, comparative effectiveness, and increased generics. All of these things significantly weaken pricing power for pharmaceutical companies (e.g. PFE, MRK, BMY, LLY), which in turn lowers these companies returns.

A Democratic-appointed FDA commissioner could provide a positive impact by speeding up the new drug approval process. The vast majority of congressional allegations of FDA mishandling of drug-related issues is coming from Democratic leadership. With a Democratic-Congress, there ought to be more reluctance from the FDA to question and interrogate FDA officials under a Democratic-appointed FDA commissioner.

However, the speed in which companies can get new drugs on the marketplace may be negated if government pricing of drugs leads to lower profits and, thus, lower R&D budgets. If this scenario plays out, then the positive impact regarding the FDA is less important.

The impact on biotech companies is relatively neutral.
Generic biologic legislation may be passed in the next four years, but biotech companies are less exposed to the pricing pressures generics create than other drug companies. This is because the complexity of biologic products would likely require an approval pathway to include clinical studies to demonstrate equivalent efficacy and safety. This creates higher barriers to entry and lower returns on investment for the generic biologic industry, which in turn decreases generic competition and the price differential between branded and generic biologics.

Direct negotiation of Medicare drug pricing could, however, have a slightly negative impact.

The impact is negative for medical devices.
Medicare reform would certainly affect cardiovascular devices (e.g. STJ, MDT) and orthopedic devices (e.g. ZMH, SYK) since these devices are largely paid for through the Medicare. Changes to Medicare payments could lead to less-favorable pricing and less favorable mix. Democrats also favor comparative effectiveness and greater regulation of sales and marketing practice. This too would put more pressure on pricing and mix, which in turn would lower the long-term secular growth of medical device companies.

The impact is neutral for medical supplies.
Medical supplies (e.g. COV, TMO) have lower exposure to U.S. healthcare reform owing to their low prices and international diversification. Universal healthcare could be a slight benefit should the volume of healthcare services increase.

The impact on labs and diagnostics is positive.
Universal health coverage could benefit the lab and diagnostics industry (e.g. DGX) since Democratic-led healthcare changes would likely stress preventative care measures. Lab testing is viewed to be cost-effective and able to offer early detection/prevention.

The impact is positive for generics, which in turn is slightly positive for the PBMs and drug distributors.
With both Republicans and Democrats pushing for generics to come to the market faster, we are likely to see generics (e.g. MYL) gain a larger share of the overall prescription market, which also benefits PBMs (e.g. ESRX) who profit more from generic drugs than branded drugs. Any expansion of health benefits (expanding SCHIP and possibly Medicaid) is beneficial to PBMs and distributors, as the number of individuals having insurance increases, so should the number of scripts being written.

The impact on Healthcare IT is positive.
Obama wants to spend $50 billion a year for five years on computerized health records (e.g. CERN); technology that both Republicans and Democrats believe can save money.


To read more about potential winners and losers of the new political landscape, check out this Bloomberg article.


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Peter Lazaroff, Junior Analyst