Wall Street on the Healthcare Industry: Strong, but Strange
The state of the healthcare industry is strong, if you ask Wall Street. That message came across clearly at a recent Nashville Health Care Council event where, over the course of the hour, four industry analysts avowed that healthcare – despite uncertainty – is still very much an investible sector.
More than 700 people attended the panel at the downtown Omni ballroom Thursday to dine on pistachio-encrusted chicken and listen to Community Health Systems CEO Wayne Smith probe speakers.
Smith opened the event, true to form, by ribbing panelists about various SEC football teams. Frank Morgan, a managing director at RBC Capital Markets, but, apparently more importantly, a graduate of the University of Alabama, bore the brunt of the jokes.
Also on the panel were Deutsche Bank Director Kristen Stewart, Credit Suisse Managing Director A.J. Rice and Nephron Research Senior Analyst Joshua Raskin.
They were all good sports. And, even though they were addressing a room full of people well-versed in the latest healthcare news, the speakers shared keen insight into a handful of subjects that have been on everyone’s mind.
Every healthcare wonk worth her salt is watching closely to see if and how the proposed merger between CVS and Aetna is about to go down.
In terms of massive healthcare mergers, strange is the new normal, according to Raskin.
“I think we are at a point in the cycle where the typical consolidation is not going to happen much anymore,” he said. “[We’re in] the part [where] strange bedfellows end up getting together,” which he predicts will drive organic growth.
But just because weird mergers are becoming more common, that doesn’t necessarily mean they’ll be successful, the experts said.
“We’re pretty skeptical on the CVS/Aetna merger,” Rice said, given it appears to him that a retail business is trying to back into managed care. “I think the things they’re talking about doing are interesting long-term, but they’re not going to be easy to do.”
No death spiral
The analysts agreed that Affordable Care Act is probably going to survive. Barring an unlikely volume of Republican victories in the 2018 congressional races, they concurred that the chutzpah behind “Repeal and Replace” has dwindled.
“I think we’re at an equilibrium as long as the administration doesn’t do something further to undermine it,” Rice said.
RBC’s Morgan agreed, citing the fact that 85% of people with insurance plans from the exchange are receiving substantial subsidies. Some insurance companies selling those plans are even set up to make a little money, he noted. “This worry about the [ACA] death spiral is probably a little bit exaggerated,” he concluded.
One way to tick off a room full of providers running on hairline margins is to mention the smashing success of the pharmaceutical and device industry. And yet…
Smith checked in with Deutsche Bank’s Stewart about how folks in the medical device business were faring.
“They’re very healthy,” she said, adding that some companies in the cardiovascular space were seeing gross margins of up to 70 percent. “Yes, you heard me right, I did say 70 percent,” she said, adding that in medical supplies, the margins were slightly lower, still coming in at a healthy 50 to 60 percent.
On the drug side, Nephron’s Raskin seemed to think that all the bluster in Washington about cutting healthcare costs by cracking down on pharma wouldn’t amount to much.
“We couldn’t have had more political rhetoric and regulatory scrutiny around drug pricing – and literally nothing happened,” he said.
He did seem supportive of the recently announced effort spearheaded by Intermountain Health to bring hospitals together to create a non-profit drug company.
“Yeah, I love it,” Raskin said. “If you can’t beat ‘em, beat ‘em. I tell people that leverage is the mother of invention –” an axiom that could apply to the healthcare sector overall.
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