New Baird Report Identifies Pockets of Potential in Health Care Sector
Findings Set the Stage for Baird’s Annual Health Care Conference in New York City Sept. 7-8
NEW YORK, Aug. 24, 2011
Eric W. Coldwell
Jeffrey D. Johnson
Christopher J. Raymond
As a preview to its annual Health Care Conference, the Health Care/Life Sciences research team at Baird recently published, “Health Care: Then and Now and Best Health Care Ideas
,” a report that looks at trends across the firm’s health care platform and identifies pockets of potential opportunity for investors.
The employee-owned international capital markets, private equity, wealth and asset management firm will host the conference in New York City Sept. 7-8. The conference will bring together institutional and private equity investor attendees to hear presentations from company executives representing more than 80 public and privately held companies across a range of sectors including Biotechnology, Distribution & Services, Life Sciences & Diagnostics, Medical Technology, Facilities, Specialty Pharmaceuticals and Cardiovascular Devices.
Sector Performance, Outlook
“Since the April 2011 market peak, health care has outperformed the broader S&P 500, reminiscent of the early stages of the Great Recession, with S&P 500 Pharma (-8%) and S&P 500 Biotech (-9%) again outperforming the market’s -14% and health care overall (S&P 500 Health Care) falling only 11% vs. the S&P 500’s 14% decline,” the team writes in the report. “While encouraging, we believe too many near-term uncertainties exist to try and make a health care sector – or even sub-sector – call here.”
In the report, the team offers significant insights into past sector performance. “In the early stages of the Great Recession, health care outperformed the broader market (S&P 500 HC -40%/S&P 500 -57% from Oct. 2007-March 2009) thanks to the “defensive” premium investors historically afforded the group. Yet health care stocks underperformed from the March 2009 market trough to the recent April 2011 peak, as early- and mid-cycle sectors (consumer discretionary, etc.) returned to favor and health care dealt with reform-related uncertainty, declining utilization and other factors.”
According to the study, it’s impossible to predict at this time whether health care, as a whole, is set up to outperform in the near-term and then lag again. However, the team does note a number of differences in the current cycle vs. three years ago. The report points to industry factors related to leverage, M&A, generics, Health Information Technology funding, and pharmaceutical consolidation that have generally improved since the last downturn.
Near-term uncertainty persists, however, particularly due to the contentious budget process in Washington. The Baird report states, “It is clear that the unknowable uncertainties between now and Nov. 23 for the Super Committee has created substantial forced rotation and selling across all health care provider sectors. Underperformance is easily located in two buckets: (1) heavy Medicare reliance and (2) levered names. This has been a shoot first, ask questions later market ...” The Super Committee is a joint select committee of the U.S. Congress created by the Budget Control Act of 2011.
Opportunities for Investors
The report concludes that opportunities for investors do exist, pointing to stock-specific recommendations within several health care sub-sectors. “We see pockets of relative potential, with conviction highest for stock-specific – not health care sector or even sub-sector – reasons,” the analysts write. “Broadly, we have relatively higher conviction in hospitals, biotech, HC technology, and the more consumer-oriented areas of medtech (dental, contact lenses).”
Baird Senior Analyst Eric W. Coldwell
(Health Care Distribution & Services) agrees, “Health care is under-owned and under-valued. We think 2011/2012 will look different from 2008/2009, even though the stocks today are acting similar.”
Following is commentary specific to these sub-sectors excerpted from the full report, as well as some of Baird’s health-care analysts’ top stock picks:
: The bipartisan Special Joint Committee negotiations between now and November will create an overhang on health care – especially sectors and companies dependent on entitlement spending such as Medicare and Medicaid. However, the range of outcomes isn’t nearly as variable as it was during the health care reform debate when more radical ideas were on the table. Regardless, names with more limited exposure to government spending may outperform during this time. Baird Senior Analyst Christopher J. Raymond
(Biotechnology) likes Celgene Corporation (CELG)
and Human Genome Sciences (HGSI).
For Healthcare Technology
: According to Eric Coldwell, Health Care Information Technology (HIT) stocks, broadly defined, have trounced the market in all environments and unlike other sectors such as Contract Research Organizations and Distribution, where macro trends determine group performance more than individual performance, stock-picking is key in HIT. His top pick here include MedAssets, Inc. (MDAS),
which he believes is trading at a good valuation discount with a 2011 EPS outlook that is solidifying above consensus, and Merge Healthcare (MRGE),
which has transformed a unique investment idea for imaging into real growth.
: Baird Senior Analyst Jeffrey D. Johnson
O.D., CFA, (Medical Technology) believes reimbursement/regulatory overhangs are likely to persist over coming quarters, making it more difficult for ortho/spine names and providing a key point of (positive) differentiation for dental stocks and contact lens manufacturer The Cooper Companies (COO).
He also believes utilization is much more likely to improve over the next 6-12 months and not decline the way it did in 2009 and 2010, while other ancillary factors (M&A potential, easing comps, etc.) also exist that could help even some of the large-cap ortho/spine names to outperform over the next 12 months.
In addition to Mayo, Raymond, Coldwell and Johnson, Baird’s Health Care/Life Sciences research staff includes Quintin J. Lai, Ph.D., CFA (Life Sciences & Diagnostics), Lawrence H. Neibor (Cardiovascular Devices), and Thomas J. Russo, CFA (Biotechnology).
Baird’s Research Department consists of approximately 110 research professionals covering more than 660 U.S. companies. Baird analysts have been recognized repeatedly in The Wall Street Journal’s
annual “Best on the Street” survey and honored by StarMine as top analysts.
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