4 Reasons to Be Optimistic About Healthcare
Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In last month’s brief earnings call, Express Scripts (NASDAQ: ESRX) CEO George Paz happily announced a better than expected outlook for the 2013 fiscal year. The company provided guidance on 2013 earnings of $4.20-$4.30 per share, while analysts were expecting the extreme low-end of the guidance.
Paz noted the company’s outlook is bolstered by the positive outlook of the healthcare industry as a whole based on several key factors: an aging population, healthcare reform, the introduction of new specialty drugs, and the expiration of patents on name brand drugs. Here, I’ll examine each more in-depth, and see exactly how these trends stand to benefit Express Scripts among other healthcare companies.
The Congressional Research Service released a report in 2011 documenting the expected rise in the elderly population of the United States. Within 12 years, the survey expects nearly 18% of all Americans will be aged 65 or older. By 2050, the research service expects the population of age 80 and above citizens will reach 7.4%.
Most importantly, the report claims the number of people in poor health is “almost certain to rise.” The benefits to the healthcare industry of a growing drug-reliant population should be self-evident. The effect of increased drug prescriptions will benefit everyone from drug makers, to pharmacies, and, of course, pharmacy benefit managers like Express Scripts.
The Patient Protection and Affordable Care Act won’t take effect in 2014, but that doesn’t mean you can’t use that knowledge to invest now. The big winners in my opinion are Medicaid-based insurers such as Molina Healthcare (NYSE: MOH) and Centene (NYSE: CNC). That’s why we’ve seen a number of big acquisitions lately such as WellPoint (NYSE: WLP) acquiring Amerigroup (to become the largest Medicaid-based insurer) and Aetna purchasing Coventry Health.
The sudden influx of newly insured patients will help ease the margin pressure Medicaid insurance specialist companies have faced in recent years. Last year Centene took a loss, and Molina posted an operating margin of just 0.6%. For wide-based insurers there is a pricing risk as Medicaid enrollees are generally very low margin customers.
Express Scripts stands to gain as a PBM through its largest customer, WellPoint. WellPoint made it clear that it aims be the market leader in Medicaid enrollment when it announced plans to acquire Amerigroup. Additionally, the pricing pressure will help attract new customers to PBMs such as Express Scripts as companies look to contain costs.
New specialty drugs
Specialty drug treatments is a booming industry. Spending on specialty medications for diseases like rheumatoid arthritis, hepatitis C, and cancer rose 18.4% last year. The industry accounted for near one-quarter of total drug spending in 2012.
Over the last decade, Express Scripts has expanded its specialty drug operations to include specialty pharmacies – to help with the often complex administration of specialty treatments. It also relies on its massive mail-order unit to distribute specialty drugs to areas of the country where it doesn’t operate pharmacies.
The Medco merger is a big play in the cancer treatment industry. Medco launched its Therapeutic Resource Center for oncology patients at the start of 2010, and is a leader in specialty cancer pharmacies. Additionally, the company's advances in genomics, such as using gene tests to prescribe blood thinners, provide another avenue of specialty treatments.
A few big name drugs are going to go generic in the next 18 months. Eli Lilly’s Cymbalta is the biggest among them, losing its patent protection in December of this year. Novartis’ big money-maker, Diovan, is available in generic form starting this month. Abilify (Bristol-Myers Squibb) and Nexium (AstraZeneca) will lose protection next year.
While the patent cliff usually spells bad news for drug-makers without another blockbuster in the pipeline, the endless feed of big name drugs coming off patent is great news for PMBs. Express Scripts makes much higher margins on generic drugs compared to their name brand counterparts. In fact, Express Scripts will often take losses on name brand drugs, which are offset by the highly profitable generic brand later.
The Right Prescription
George Paz seems rightfully optimistic about the upcoming year in the healthcare industry. Its focus on specialty pharmacies and treatments is likely the biggest driver for growth over the next few years, and will be especially important as the generic drug pipeline dries up in 2015. Still, the aging population and healthcare reform laws ought to add plenty of new customers for Express Scripts, albeit many will be less profitable than average. Overall, the outlook for Express Scripts is bright, and I have no reason to doubt its CEO.
Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Express Scripts and WellPoint. The Motley Fool owns shares of Express Scripts and WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!