Obamacare Is Here: 2 Healthcare Stocks to Buy Now
Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
President Obama's Affordable Care Act is seemingly shifting the landscape of the healthcare industry. Firms are looking to cut costs to keep up with the expectations of the current administration -- expectations that seek to lower spending on healthcare, while imposing taxes and regulations on many healthcare companies. Healthcare firms need to "get cheaper" to adapt, especially if they want to remain competitive, and many companies are.
The largest global drugstore is positioning itself for success...
The largest U.S. drugstore, Walgreen (NYSE: WAG), along with partner Alliance Boots, recently signed a decade-long deal with AmerisourceBergen (NYSE: ABC). Walgreen is looking to shift its distribution duties (the company currently distributes around 80% of its own drugs) to AmerisourceBergen, who says that the contract could be worth up to $28 billion in fiscal 2014. So what's in it for Walgreen?
The contract with Amerisource will give Walgreen a more consolidated distribution network in both the U.S. and Europe, which will allow them to not only grow in size and scale, but also to negotiate better prices for low-profit prescription drugs they sell in bulk. It helps the company get "cheaper" and allows them to be even more competitive. Walgreen CEO Greg Wasson commented on the new partnership, stating:
"Alliance Boots and AmerisourceBergen are experts in pharmaceutical supply chain distribution... We are very good at it, but the combination of what they both do to improve our supply chain, take that off of our hands, and improve our service levels is really the opportunity that we are excited about."
Walgreen and Alliance Boots also have the option to eventually purchase up to 23% of their new distribution partner, which would make them Amerisource's largest shareholder. It should be a win-win situation for all parties involved, and will help them adapt and relatively prosper under "Obamacare."
Not everyone is happy, however...
The loser in this deal is Cardinal Health (NYSE: CAH), whose shares fell roughly 7% after the announcement that Walgreen would be partnering with Amerisource. Cardinal Health's distribution contract with Walgreen's will expire in August. Moody's has estimated that Walgreen as a customer accounted for 21% of Cardinal's sales in 2012. The company's contract with CVS is also set to expire soon, as well.
A smaller healthcare player poised to pop...
AmSurg Corp. (NASDAQ: AMSG) acquires, develops and operates ambulatory surgery centers in partnership with physicians. At Dec. 31, 2012, AmSurg owned and operated 240 centers. The company has many positives going for it as well. Chuck Carnevale of TheStreet.com thinks it may be a great stock poised for growth under Obamacare. He cited strong earnings growth and historically low valuations as positives.
Carnevale also noted that the company's CEO, Christopher A. Holden, when speaking to the Barclays Global Healthcare Conference in early March 13, noted that Obamacare would be a positive for the company's growth and profitability in the long term, especially since surgery is increasingly being performed on an outpatient basis. Hedge funds also seem to be noticing the small-cap healthcare company with a market cap of a little over $1 billion. Why? Maybe this will help answer. According to the company:
"By focusing on the delivery of high-quality, low-cost surgery services that create high patient and physician satisfaction, AmSurg Corp. creates value for the three constituencies involved in every surgical procedure: the patient, the physician and the payor."
Doing a quality job cheap is the perfect business model for the upcoming paradigm shift in the healthcare industry. AmSurg is already better positioned than most.
The bottom line
Walgreen and AmSurg are both well positioned to benefit from the Affordable Care Act. Walgreen is expanding their distribution network and scale, which will allow them to lower costs while still remaining competitive. Walgreen is also hedged outside of the States as well, as their partnership with Alliance Boots gives them instant access to European markets, as well as possible expansionary growth in emerging markets. They are building up a drugstore empire.
AmSurg as a high-quality, but low-cost surgery services company is also poised to profit and thrive in an environment with decreasing costs. As AmSurg's CEO explained to Citigroup:
"I think we've always held out and particularly in the last 5 years the obvious cost value of the surgery center space. If you look at Medicare, I'll say this over and over again, it's -- we're almost half the price as the other alternatives. And in a country that's trying to solve the cost curve, or trying to bend the cost curve, we're -- the more advantage they take at the surgery center space, the more savings, obviously."
As everyone looks to lower costs, AmSurg has already done it. The changing landscape of the healthcare industry will force companies to adapt to the times if they want to remain competitive, and Walgreen and AmSurg are two companies that not only realize this, but are doing something about it.
Joseph Harry owns shares of Walgreen Company. The Motley Fool has no position in any of the stocks mentioned. 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!