November 8, 2010 / 3:37 AM / in 7 years

Healthcare sector seeks remedies as market shifts

NEW YORK (Reuters) - Once considered a reliable haven for investors, the healthcare market endured a major shake-up this year, and the industry is still trying to pick up the pieces.

The U.S. government passed healthcare reform measures that impose a wide array of fees and regulations on health insurers, pharmaceutical companies, medical device makers and the rest of the sector.

While the law paves the way for 30 million uninsured Americans to gain coverage -- meaning a wealth of new customers -- they will not come on board for a few years.

That comes on top of the biggest wave of patent expirations in the history of the pharmaceuticals industry, which will reach a peak in 2011 and 2012.

“Healthcare used to be a defensive sector, but those characteristics are waning,” said FAF Advisors healthcare analyst Tim Nelson. “It’s not bullet-proof anymore because the consumer is involved.”

So far this year, the S&P Health Care index .GSPA has risen only 1 percent, while the broader S&P 500 index .SPX has climbed 9.5 percent. Healthcare companies in the index on average trade at about a 12 percent discount to the broader market based on forward earnings estimates.

But that does not necessarily make them cheap, given the concerns over how they will grapple with new regulations, generic competition and a move by government in the United States and Europe to rein in healthcare costs.

“Healthcare stands out as an underperformer,” said Les Funtleyder, a portfolio manager with Miller Tabak. “The one broadest conclusion you have is fears about reform.”

Nelson said investors may need to lower their expectations.

“Healthcare is becoming more of a value sector versus a growth sector, or stuck in the middle somewhere,” he said. “You can get growth at a reasonable price, but it’s not the go-go growth of three or four years ago.”

Top executives and officials from the healthcare sector will address these issues and more during the Reuters Health Summit in New York this week.


The healthcare industry is also finding that sales of products and services once immune to economic downturns are slowing as consumers search for ways to save money.

“Shifting healthcare costs to consumers helps employers save money. It’s the new way of the world,” Nelson said. “Increased regulatory requirements mean less innovation, less differentiation and more pricing pressure for the foreseeable future.”

Some of the pressure on U.S. insurers and other healthcare companies may lift now that the Republican party has taken a majority of seats in the U.S. House of Representatives in midterm elections.

    Republican representatives say they want to repeal the healthcare reform law. But while that is unlikely, the split leadership of the House and Senate could create legislative gridlock that stalls the overhaul.

    Still, companies have already started to bear expenses from the new law, and investors are trying to wrestle with the extent of the changes ahead.

    “Either the revenue side of the equation will go down, like you get less reimbursement or fewer people, or the costs will go up because you have to comply with new regulations,” Funtleyder said, describing investor fears over reform.

    For drug companies, the drumbeat of patent expirations becomes deafening next year. Led by Pfizer’s (PFE.N) Lipitor, a wave of top-selling drugs will lose their patents and sales will be quickly eroded by low-cost generic copies.

    “Pharma is probably facing more challenges than they have faced in recent memory,” said Jim Prutow, a partner with consulting firm PRTM. “They’re challenged in how they go ahead and continue to meet these revenue and earnings they’ve been able to produce in the past.”

    Companies of all stripes are confronting their challenges by diversifying, cutting costs and investing in new, international markets, particularly the emerging economies.

    And some seem intent on buying their way out of their problems. The latest major deal saga involves the $18.5 billion hostile bid by France’s Sanofi-Aventis (SASY.PA) for U.S. biotech Genzyme Corp GENZ.O, after mega-mergers struck by Pfizer and Merck & Co (MRK.N).

    “I don’t think we’re finished seeing some of the top 15 pharma going ahead and becoming larger and larger,” Prutow said.

    Reporting by Lewis Krauskopf; additional reporting by Debra Sherman; Editing by Michele Gershberg, Dave Zimmerman, Diane Craft

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