Bellevue Asset Management: US healthcare - fear of change (again) creates opportunity for investors

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Bellevue Asset Management: US healthcare - fear of change (again) creates
opportunity for investors
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"Political noise" from US elections is masking constructive changes in American
healthcare system. The healthcare experts of Bellevue Asset Management have a
look at the ongoing industry changes and see good investment opportunities in
the healthcare sector.

Market fears about the economic impact of the Affordable Care Act on the
healthcare industry some five years ago created a prolonged bull run opportunity
for investors in US healthcare stocks up until last fall when the political
discussion of the presidential primaries led to a dialog on pricing controls,
further government moves to a single payer system, and alternatively, positions
on outright appeal of the Affordable Care Act. Stock market reaction to the
"political noise" was negative using this discourse to take profits and turn far
more risk adverse in front of potential increases in interest rates and a
stronger US economy. That did not happen and thanks to the Brexit, concerns
about the economy remain. This is good news for healthcare investors as
healthcare company financial performance is now likely to look relatively
stronger in 2017 than previously expected. Based on our assessment of the next
few years, valuations now look very attractive relative to the S&P 500 and
historical comparisons for P/Es and PE/G ratios, especially in biotech, generics
and services. Medtech has been the better performing sector so far this year,
but still looks reasonably valued given its relative growth prospects and cash
flow generation.

From now until the November elections, the rhetoric on healthcare policy will

ebb and flow and so too will trading volatility in healthcare shares. For us
that is opportunity! In our view, investors must look beyond the "noise" and
realize that industry is going to be part of the solution and not the problem.
We have three key points that investors in US healthcare stocks should consider
in contemplating next investment moves in the weeks to come. (1) The November
presidential elections are a big guess at this point. Regardless of who wins, it
is highly more likely that Republicans while losing some seats, will maintain
control of the House and probably the Senate. Thus, legislative change will be
slow. (2) State actions to deal with the financial burden of health care
spending may prove to be the most effective path to capping healthcare costs.
Our insights on what is happening in Massachusetts, New York and California
suggest a real solution to capping healthcare inflation. And (3), if we are
right about what happens at the state level, "innovation and consolidation" will
be the winning theme for investors in 2017 and beyond.

Ongoing healthcare reform is inevitable

At 17% of gross domestic product, healthcare spending in the US outstrips every
other modern nation. For example, at number 2 is Switzerland at 11.5% but its
GDP per capita is 60% higher than the US. 17% is a major issue for the US
economy and federal budget. The Affordable Care Act was promised to make
healthcare affordable and check healthcare inflation. Unfortunately, it did
neither. It did create an enormous ongoing tax burden (as defined by the US
Supreme Court) on the middle class and is likely to be a key reason for slower
than expected consumer spending contributing to the slow US economic recovery
over the past six years. This is not to say it was all bad. More Americans have
healthcare insurance and some of the inequities of the previous system were
eliminated such as the denial of insurance for pre-existing conditions. But the
journey is not over. The ACA remains very unpopular with the American people and
there is still a chance that Congress can choke it by limiting financial support
by the federal government. This is not a solution either. Our policy analysis of
both the Clinton and Trump positions on health care reform suggests little
substance in addressing the real, critical issues - health care's economic
burden and rate of inflation.

State actions may provide a viable solution to controlling costs

Three states in the US are out in front in efforts to deal with state-based
healthcare costs (Medicaid) - California, New York and Massachusetts. These
efforts could provide a viable pathway for national reform in the years ahead.
Our consultants in Massachusetts hospitals offer us the highest visibility on
policy action and implementation. As you may recall, Massachusetts was out in
front of other states with legislation requiring all citizens to have healthcare
insurance. Today, 96% of its citizens are insured. Unfortunately this has come
at a huge cost with 40% of the state budget targeted for healthcare and related
services. In an effort to real in this financial burden, three years ago the
state implemented a pilot program to run five years that was designed to control
spending and improve the quality of care. Its success led to an early conclusion
after just three years, and in January, laws were passed to implement this new
budgeting system for fiscal 2017. Its stated goal was to "bend the health cost
inflation curve by 200 basis points per year over the next three years". The
consolidation of healthcare providers in the state over the past decade has
positioned providers to constructively respond to such demands. Today in
Massachusetts, a hospital system includes the hospital(s), post-acute centers,
emergency and specialty care centers and its employees - doctors and nurses.
Systems unable to respond to these legislated demands and in effect change its
way of operation - reduced operating costs while maintaining quality - will be
financially penalized and eventually forced to consolidate with systems that
have figured it out.

This change in the culture of healthcare delivery and demand is key to reigning
in its inherent costs and inefficiencies. To quote one doctor leading its
hospital system in response to the new changes: "Doctors are trained in medical
school to diagnosis and treat disease, very few are trained to prevent disease.
Our independence depends on this changing." Greater emphasis must shift to
prevention rather than just treatment in this kind of system. Hospital systems
are partnering with insurance companies to provide financial incentives for its
insured to be part of the solution, not part of the problem. For example,
smoking has become taboo in the US as smokers pay higher insurance costs than
non-smokers. Obesity and type 2 diabetes are linked and implications of both
could change the demand curve in heart disease, for example, if the system
provides the right incentives and education at the personal level. This is what
is different about what is happening at the state level. It will take time but
it is a step in the right direction.

"All politics are local" but so too may be all solutions

With Massachusetts, California and New York leading the way with more viable
solutions to controlling costs and assuring quality, we would not be surprised
to see other states and eventually the federal government follow. In the
meantime, industry is likely to be out in front of the change. In our view,
companies with innovative drugs, devices and solutions to treating disease and
controlling costs will win the business. Price will be more of an issue for me-
too products and solutions. Here size will matter as those best positioned to
offer high quality products at best prices and in the broadest scale will win
the business. Companies in this second model will need to get bigger or sell out
as gross margin is likely to contract offset by reductions in bloated sales and
marketing expenses that have driven demand for the past few decades. You will
not need a large sales force to sell a contract to one executive team in each
hospital system. Doctor's today are employees not independent contractors, and
are more aligned with the needs of hospital system than ever before. Education
at the local level will still be important but there is plenty of room for cost
savings.

In summary, change is coming but in positive ways. The system in the US will
still reward (pay for) innovation. In our view, further industry consolidation
is inevitable. Pricing will pressure gross margin offset by more efficient use
of sales and marketing costs. Overall, we still view US healthcare as a growth
industry. Investors are best served thinking long-term and using a diversified
global strategy.



For further information:

Bellevue Asset Management AG, Seestrasse 16 / P.O. Box, CH-8700 Kusnacht/Zurich
Tanja Chicherio, Tel. +41 (44) 267 67 09, tch(at)bellevue.ch

www.bellevue.ch



Bellevue Asset Management

Bellevue Asset Management is an independent and highly specialized asset
management boutique focused on managing equity funds for selective sector and
regional strategies, in particular for African equities, Swiss/European
entrepreneurial equities and healthcare equities, and multi asset strategies.



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Media release:
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Source: Bellevue Asset Management via GlobeNewswire

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Datum: 29.08.2016 - 10:30 Uhr
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