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Global healthcare 2017 outlook

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Specialty pharmaceutical-generic companies that expanded pipelines through M&A and revenue through price increases are now facing scrutiny on the sustainability of the traditional model and looking toward more investment in R&D.

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Global healthcare 2017 outlook

  1. 1. Global healthcare 2017 outlook Elizabeth Krutoholow, Curt Wanek, Brian Rye, Jason McGorman, Ian Person, Sam Fazeli, Michael Shah Bloomberg Intelligence analysts
  2. 2. Large pharmaceutical 2017 outlook
  3. 3. The rapid pace of innovation among drugmakers may continue to be overshadowed by broader investment themes, such as the switch away from defensive stocks into more cyclical industries, during 2017. Though Donald Trump’s election victory means government price controls are much less likely, payor pressure on drug pricing continues. With cash remaining cheap, particularly if U.S. companies can repatriate their hoards at a low tax rate, smaller drugmakers may find themselves targeted by pipeline-hungry large pharma.
  4. 4. Cheap and repatriated U.S. cash may boost drug M&A
  5. 5. Large pharma may remain mostly focused on smaller deals in 2017, according to company management teams. Bids for Anacor (Pfizer), Stemcentrx (AbbVie), Medivation (Sanofi) and Actelion (Johnson & Johnson) underscore the fact that biotech valuations, which are significantly below previous highs, are opening the door to discussions. Access to cheap cash is a significant driver, as will be repatriated cash for U.S. large pharma. The U.K.’s decision to leave the EU may prolong the period of relaxed monetary policy.
  6. 6. Obamacare, California-type ballots key for pharma
  7. 7. With the Republicans taking all key political power positions in the U.S., drug companies may have escaped the brunt of potential government drug-pricing control, while their tax burden could ease as parts of Obamacare are repealed. One risk of negative headline news in 2017 is other states, notably Ohio, having a measure like that defeated in California on the ballot in 2017. California’s Proposition 61 was aimed at preventing state agencies from paying more than the U.S. Department of Veterans Affairs for drugs.
  8. 8. Specialty pharmaceutical 2017 outlook
  9. 9. Specialty pharmaceutical-generic companies that expanded pipelines through M&A and revenue through price increases are now facing scrutiny on the sustainability of the traditional model and looking toward more investment in R&D. Price pressures that contributed to the 36% sector decline in 2016 may abate somewhat in 2017 under President-elect Donald Trump. While price probes are likely to continue, limited action by Congress may not hinder moderate price increases on the magnitude of 10% a year. Companies that continue to reinvest in their pipelines and show organic growth in addition to expansion through M&A are likely to continue to succeed.
  10. 10. Specialty drug prices rise, generics pressured
  11. 11. Prices of specialty pharmaceuticals are still likely to rise about 9-10% a year, despite payer pressure and congressional probes on specialty pharma tactics, which are only likely to deter aggressive increases such as those historically employed by Valeant. Methods for the government to regulate cost remain prohibited but rebating may be a viable way to temper high list prices. Generic-drug prices are in a deflationary period after consolidation among distributors and a boost in FDA approvals.
  12. 12. Specialty pharma attracts suitors, consolidates
  13. 13. Specialty pharmaceutical suitors have been attracted by the rich drug pipelines with relatively limited competition and quick avenues to regulatory approval. Medicines targeting chronic diseases provide valuable long-term growth, but a wave of mergers has left fewer targets available. Still, specialty pharma’s potentially lucrative model will likely lead to further consolidation in the sector. Allergan, itself a possible target since the Pfizer deal is off the table, will make bolt-on acquisitions
  14. 14. North America managed care 2017 outlook
  15. 15. Health insurers may be poised for stronger revenue and EPS growth if Republicans strengthen Medicare Advantage and repeal some of the Obamacare taxes, but Medicaid providers risk losing some earnings. The public exchanges may still be a headwind for remaining insurers such as Anthem in 2017 as few additional enrollees are expected to sign up. Court rulings for the major M&A deals for Aetna and Anthem may be released in early 1Q, which could cause a domino effect as peers deploy capital to respond.
  16. 16. Obamacare repeal a risk, tax holiday boosts payers
  17. 17. President-elect Donald Trump and Republicans may repeal parts of Obamacare, which could ease losses for health insurers near-term but cut earnings in the long run. The insurer tax delay may boost EPS for payers in 2017, mostly for Humana, and would be a positive if repealed entirely. Public exchange premiums are set to rise 25% on average, which should help stem losses. Anthem may be the most exposed payer to Obamacare plans in 2017 and could pick up costly members as peers scale back.
  18. 18. Aetna, United may lead Medicare Advantage market
  19. 19. UnitedHealth and Aetna may lead Medicare Advantage growth among publicly traded health insurers, given they have the highest- rated plan offerings. Enrollment growth may slow for Humana and Cigna as plan ratings were cut. Cigna isn’t allowed to market plans, given the government levied sanctions because Cigna denied patients access to care and certain drugs. Medicare Advantage enrollment may grow at a high-single- digit pace through 2019 due to an aging population, among the fastest-growing in health insurance.
  20. 20. Payer M&A may give pricing power, decisions 1Q
  21. 21. Aetna and Anthem could gain significant scale and pricing power if they were able to close pending acquisitions in 1H. Aetna may have a clearer path to a settlement with the Justice Department because Medicare Advantage is a local product rather than national, but its divestiture plan may not yet be satisfactory. Anthem’s purchase of Cigna is more challenging, given the Justice Department is alleging harm to competition for the national account market.
  22. 22. Bloomberg Intelligence offers valuable insight and company data, interactive charting and written analysis with government, credit insights from a team of independent experts, giving trading and investment professionals deep insight into where crucial industries start today and where they may be heading next.

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