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July 2, 2013 3:06 pm
Doctor! Doctor! Global spending on healthcare is shrinking as austerity bites. Figures from the OECD show the annual growth of healthcare spending shrinking to nearly zero in 2010 and 2011 from an average of 6 per cent in 2008. So far, this has not undermined the investment case for healthcare stocks. Yet, as the 9 per cent slump in shares of Fresenius Medical Care on Tuesday showed, they remain vulnerable to events.
The immediate cause of Frankfurt-listed Fresenius Medical’s tumble was a proposal from Medicare in the US to cut payments to kidney dialysis providers by nearly 10 per cent in 2014. That sounds like a lot, yet the proposed cut would amount to no more than $1bn (and may be reduced). As the world’s largest provider of products and services to people requiring kidney dialysis, and with two-thirds of its $14bn of 2012 revenue in the US, Fresenius Medical is in the line of fire; DaVita Healthcare, its closest peer, was also down in New York.
Part of the investor reaction was due to the unexpectedness of the proposal. It may also be because the healthcare sector is looking pricey, on both sides of the Atlantic. The sector has been on a roll since early 2009, powered by robust earnings and defensive qualities. European healthcare stocks are trading on 19 times forward earnings, compared with 16.5 for the wider market and the S&P 500. Continued pressure on health budgets – often the biggest component of public spending – means that the prospect of earnings growth is at best uncertain. That premium looks vulnerable.
Perhaps the healthcare sector will mirror what is happening to its cousin, the pharmaceutical sector. Patent expiries and other structural issues could reshape pharma via M&A. Healthcare stocks look less ready for that, though they account for about a quarter of the $87bn of pharma/healthcare deals announced this year to the middle of June, according to Thomson Reuters. At least some of the healthcare sector’s stock market premium is M&A-related. But beware the large bit that is related to earnings.
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