SYDNEY, May 12 (Reuters) - Sweeping changes are expected in Australia’s healthcare sector when Prime Minister Tony Abbott’s government unveils its first budget on Tuesday and investors are eyeing the potential impact on healthcare stocks.
The government is looking to rein in healthcare costs, among other expenditures, after an audit of the economy released in early May recommended cuts and broad structural changes to stem what the government warns is a looming “fiscal crisis”.
Health makes up roughly 16 percent of federal government spending, so many healthcare companies’ fortunes are linked to government spending.
“It’s a major issue for the healthcare sector because nearly every part of the sector is intertwined with government policy,” said Bill Keenan, general manager of equities and researcher at stockbroker Lonsec, which holds shares of healthcare supplier Ansell.
“Overall there’s obviously going to be some negatives coming out after the healthcare stocks, it’s one sector where you need to see the budget before investing more money in it.”
Adding to the downside risk for healthcare stocks is the fact that the sector outperformed the broader market in 2013 and some individual stocks have continued to strongly advance this year - leaving them vulnerable to profit-taking.
The S&P/ASX200 Health Care Index is up 0.5 percent percent so far in 2014, compared to a broader market rise of nearly 2 percent. The Health Care index jumped 23.5 percent in 2013, outperforming the S&P/ASX 200, which added 15.1 percent.
The government audit also recommended cuts to the A$19 billion Medicare Benefits Schedule, which is the list of health products and services the government will pay for, and also the introduction of co-payments for visits to doctors.
Companies that provide these serices could be impacted. Two such stocks are Sonic Healthcare a radiology and pathology provider, and Sigma Pharmaceutical Group, a wholesale and distribution business to pharmacies.
Sonic and Sigma have gained 7.6 percent and 10.3 percent so far this year.
Analysts at UBS said that while co-payments for doctor visits might provide some revenue for medical centre operators, it could also reduce the number of doctor visits and thus the amount of pathology and diagnostic work undertaken.
The government’s pending public floatation of Medibank Private, a government-owned private health insurer, while at the same time forcing high-income earners to take out private insurance in place of Medicare, a publicly funded universal health care scheme, has also caught investors’ attention.
“Given the government is about to sell a major private health insurer (Medibank) via IPO, I expect that healthcare policies will continue to support both insurers and private hospital operators,” said Shane Storey, head of research at Wilson HTM Investment Group.
He highlighted NIB Holdings and Ramsay Healthcare as two stocks that might benefit. NIB has jumped 7.1 percent so far in 2014, while Ramsay Health Care is up 4.6 percent.
Storey declined to comment on which stocks Wilson HTM currently holds.
Abbott and Treasurer Joe Hockey have been bracing voters for hefty spending cuts and other measures in the May 13 federal budget.
Without action, the country’s deficit could swell to A$123 billion in the next four years, they have warned.
“I‘m sure the impacts (of the budget) will be far reaching and I think the essential thing is that the business is in a state that it can evolve or adapt,” said Simon Mawhinney, a fund manager at Allan Gray Australia, which owns shares in Sigma Pharmaceuticals Ltd. ($1 = 1.0697 Australian Dollars) (Reporting by Thuy Ong; Editing by Kim Coghill)