Healthcare Industry Outlook

Posted Tue Oct 14, 04:08 pm ET
Posted By: Chris Kallos, Zacks.com

The healthcare sector is not homogeneous and includes many different industries ranging from managed care organizations, healthcare facilities providers, medical device manufacturers through to biotech and pharmaceutical companies. Investors in heath care therefore should remain mindful of the different drivers and appropriate metrics associated with the various sub-sectors.

That said, and recent market volatility aside, long-term growth of the healthcare sector overall continues to be fuelled by aging of the population and decisions in Congress related to government funding. Given the upcoming presidential election and despite the relative lack of detailed discussion at the candidate level, healthcare policy changes remain an important signpost to investing in the sector.

For example, the introduction of Medicare Part D several years ago highlighted the role of managed care organizations under the current Bush administration. Despite recent suggestions by Democratic senators to increase scrutiny of Medicare Advantage plan providers, we believe managed care will continue to play a central role in the distribution of healthcare services and an important sub-sector of healthcare for investors.

Nonetheless, we believe further weakening of the economy would most likely exacerbate the already high level of uninsured in the population, which in turn would negatively impact other healthcare sub-sectors such as hospitals and add to already significant levels of bad debt.

Opportunities

Despite our currently neutral stance on managed care providers overall, we continue to rate Wellpoint (WLP) as a Buy given its broad product offering, geographic reach and potential for added synergy gains from relatively recent acquisitions. Furthermore, managed care companies in general remain well-capitalized and unlikely to be affected by the current credit crisis, negative investor sentiment aside.

Humana (HUM) also remains attractive at current levels. The company is one of the largest healthcare plan providers in the United States, with approval from The Centers for Medicare & Medicaid Services (CMS) to offer the Medicare Part D prescription drug plan (PDP) to the more than 42 million Medicare-eligible beneficiaries.

Weaknesses

Highly leveraged companies are obviously more likely to be affected by any deterioration of the current credit crisis. For example, Healthsouth (HLS), which, despite efforts to reduce debt exposure, remains vulnerable .

Last edited Fri Oct 31, 2008 02:01 AM
by NikhilTorsekar (Portfolio Manager / Buy-Side Analyst)