Five Health Care Stocks For the New Landscape

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After months of histrionic headlines about socialized medicine and Congress’s continuous plodding on health care legislation, it’s not surprising that some investors have turned skittish on health care stocks. After all, reforms of any kind, some analysts say, could hurt the profits of health care companies, especially Big Pharma firms, which rely on promising but pricey blockbuster drugs.

Some professionals, however, have written a new prescription for health care investing, anticipating that whatever legislation emerges will create a host of new winners. They include a number of hospitals and generic-drug makers, which will see more customers solely because more people will be insured. Medical supply and research firms could come out ahead too, because the government has earmarked billions for health records and scientific studies. And many other firms still have demographics on their side – starting in 2011 the first wave of baby boomers hits age 65, and their health care needs will rise. “No company will be completely unscathed,” says Mark Oelschlager, manager of the Live Oak Health Sciences fund. “But you can find good opportunities.”

Best of all for health care investors is that all the talk of reform has depressed the stock valuations of many firms. True, many drug companies aren’t growing as fast as they were a few years ago, and some insurers now have razor-thin profit margins. But the industry is still packed with steady earners paying attractive dividends. In fact, health care stocks are expected to be the biggest contributor of earnings among the firms in the Standard & Poor’s 500 index this year, accounting for nearly 20 percent of total profits, says S&P senior index analyst Howard Silverblatt.

Some health care companies don’t even need any new legislation to benefit from the drive to change health care. The government earmarked $19 billion for digitizing medical records in the stimulus package passed in early 2009. That will help hospitals – many of which are still keeping patient information in big manila folders – to upgrade computers and software. That should benefit McKesson, already a leader in advanced health care information systems.

The reform drive also has put a new emphasis on reining in spending, which could help firms that take costs out of the system. Hospitals, for instance, are trying to cut down on costly readmissions of patients, and companies that can help could see their business surge. One company, RehabCare Group, now runs rehab centers that can treat all sorts of patients, whether they’re stroke victims or folks recovering from hip surgery. And it’s developing systems to track their progress and make sure they don’t need a return trip to the hospital.

Does this mean all health care stocks are surefire winners? Hardly. It could take years for some of the changes to shake out, and some investors admit they’re on edge. “Everyone’s on pins and needles,

says Rosanne Ott, manager of the Alger Health Sciences fund. But Ott and other pros say that with so much uncertainty hovering over the sector – and prices so depressed – it’s a good time to invest.

THE PICKS

McKesson

The San Francisco-based firm is best known as a distributor of pharmaceutical and medical supplies, but it’s also a leader in installing advanced health care information technology systems in hospitals and clinics. More hospitals are switching over to electronic medical records. Plus, this year’s federal stimulus package set aside $19 billion for health care professionals to upgrade their record systems.

Teva Pharmaceutical

The Israeli company acquired a big rival, Barr Pharmaceuticals, last year and now has 22 percent of the U.S. generic-drug market, the largest share in the business. Teva says it could launch 25 generic drugs by 2010, with up to 10 that it could make exclusively for 180 days. Also, the firm is diversifying into branded drugs, says health care analyst David Windley, of Jefferies & Co. Teva predicts its earnings will increase by around 35 percent in 2010.

RehabCare Group

Based in St. Louis, the firm operates 11 rehabilitation hospitals and centers and sends therapists to more than 1,200 nursing homes and hospitals around the country. The firm has been making acquisitions and deals with rehab centers to offer many types of therapy. RehabCare could pick up more business, says Andreas Dirnagl, health care services analyst for investment bank Stephens, since it helps hospitals cut down on patients being readmitted for the same illness.

TWO BONUS PICKS

Express Scripts

Pharmacy benefits manager Express Scripts handles nearly 500 million prescriptions a year, buying drugs at bulk discounts, creating lists of drugs covered by insurance and then supplying them to pharmacies and patients through the mail. The company is soon acquiring Wellpoint’s pharmacy benefits business, adding another 265 million prescriptions and 25 million customers.

The deal should give Express Scripts more clout to negotiate steeper discounts with drug makers, says analyst Constanine Davides, with JMP Securities. Company executives say they’re pushing for health care reform, since it would expand drug coverage. “We’re in a great spot for the reforms,” says chief medical officer Steve Miller. Some caution that pharmacy benefits managers such as Express Scripts could face more government scrutiny of their business. For now, however, some pros say the stock looks like a bargain.

Life Technologies

The government is giving $8 billion to research labs over the next few years to help scientists discover new drugs and therapies. Those labs will need equipment to conduct experiments, which is where Life Technologies comes in. The firm makes everything from gene-sequencing tools to tests for the H1NI swine flu virus, and over half its revenues come from academic and government labs that are starting to see their budgets rise.

Life’s shares have nearly doubled over the last year and analysts don’t expect that kind of pop over the next 12 months. But the stock is not expensive, analysts say.

2009 Copyright The New York Times Syndicate