In a previous post I spelled out, why I am buying healthcare stocks for an Obama presidency . In that post I promised to provide three stocks that would benefit from this fact. The first stock was AET and now I will discus the second stock in this series, Schering-Plough Corporation.

Schering-Plough (SGP)

Schering-Plough discovers, develops, manufactures, and sells pharmaceuticals worldwide. The company has a joint venture with Merck & Co., Inc. for the development and management of two cholesterol-lowering drugs and an allergy/asthma drug.

Political concerns over government price negotiations with pharma companies have pressured the industry’s stock prices over the past year. I feel that this impact will not be as large due to its slowing momentum in Washington and the patent expirations coming in the next 3-7 years. These patent expirations will lower drug costs for consumers and insurance companies devoid of any government plan.

It is apparent that many big pharmaceutical companies are facing numerous blockbuster patent expirations in the next 3-7 years. In my opinion, Schering Plough has the best portfolio and pipeline position within the big-pharma group. Although SGP stock has faced headwinds from a recent ENHANCE panel, which I will discuss, I feel because of their above average portfolio/pipeline SGP will out perform its competitors in the next 12-18 months.

Product Portfolio and Pipeline

Almost every U.S. pharma company will experience sharp blockbuster patent expirations starting in 2011. Add this to a large pipeline shortfall along with the fact that drug development takes a decade and the future becomes very foggy for these firms.

In this fog, one pharma firm stand out, Schering Plough. SGP has the lowest patent exposure in the industry, with only 15% of current revenues exposed to patent expirations in the next 7 years. This relatively low exposure will allow SGP to remain the industry’s top growth firm well into 2012.

Source: Credit Suisse Estimates

SGP has its fair share of patent expiration in the next 7 years, these include Zemuron, Puregon(Follistim), Livial, Temodar, Implanon, Noxafil, Depot, Avelox, and Asenapine. But if you look at the expected revenue of SGP’s pipeline compared to the loss of patent exposed revenues, SGP is an industry leader. Its 2015E pipeline revenues exceed its patent exposed revenues by 11.6%.

Source: Credit Suisse Estimates

Given the above information, you can see why I feel SGP has the best pipeline/portfolio mix to weather the coming patent expiration storm.

Concerns over ENHANCE Cholesterol Findings

The study found that Vytorin, a combination of Merck’s Zocor and Schering’s Zetia, worked no better than Zocor alone at removing plaque from arteries. This has had the effect of reducing the market share of Vytorin from ~12% to about ~9.0%, where it has stabilized since April. The ENHANCE panel results should not effect the stock price further as Vytorin’s market share is stabilizing.

Valuation

Given SGP’s low exposure to patent expiration and promising pipeline revenue, investors would expect to see SGP have a premium multiple. This is not the case.

Looking at the industry’s P/S and P/E multiples we see SGP trading inline with its more patent exposed and less pipeline plentiful competitors. I feel SGP is deserving of conservative industry leading forward multiple of 15x giving me price target of 26.00, representing 20% increase from yesterday’s close.

Tags: Equities, Healthcare

In a previous post I spelled out, why I am buying healthcare stocks for an Obama presidency. In that post I promised to provide three stocks that would benefit from this fact. The first is Aetna Inc.

Aetna (AET)

Aetna, Inc. operates as a diversified health care benefits company primarily in the United States and Canada. The company provides health insurance products and related services, including medical, pharmacy, dental, behavioral health, group life, and disability plans, as well as medical management capabilities and health care management services for Medicaid plans.

Aetna has been making a strong recovery from its annual loss in 2001, showing consistent EPS growth in the following 7 years.

Source: Aetna Inc. SEC Filings

Many of its competitors have gone through troubling acquisitions, while Aetna has built consistent organic operational growth. Much of this has come through the addition of new product offerings and integration among its segments to optimize cross selling.

I am promoting a buy on AET because of its strong operational success and affordable valuation.

Operational Success

In Q2 we learned that AET has already achieved 72% of their full year membership guidance. This should put the wind at their back to meet their full year membership goal of growing medical membership by 50,000 “lives” in 2008.

In 2007, 5.7% of Aetna’s pre-tax income was generated by Medicaid and Medicare healthcare programs. AET is diversifying is revenue streams and seeking to gain greater access to Medicaid and Medicare markets and many analysts estimate that AET could generate over 10% of EBT from these programs in 2008.

Additionally, AET reaffirmed its guidance for full-year 2008 EPS, while other healthcare companies such as Coventry Health Care have had to reduce full year guidance due to cost pressures. AET’s new product offerings, scale, and growth have allowed it to better handle cost pressures.

In my past post, I spoke of the most likely scenario for universal coverage would be for an expansion of the Medicare and Medicaid programs. With AET’s diversification into these growing markets, it will stand to benefit from an Obama presidency.

Valuation

AET trades at 8.9x forward earnings estimates with a PEG of .6 which compares to its industry F P/E multiple of 9.3x. This is the same level in which AET’s valuation bottomed out at in late 2003. I feel that the entire industry will experience a multiple expansion over the next 12-18 months as investors realize that cost pressure will subside and government spending on healthcare will increase. AET should receive the greatest benefit from this multiple expansion due to its strong operational success and growth.

Tags: Healthcare, Obama

If you own any healthcare stocks, especially HMOs, you have felt the unease of investors this year. In an election year, especially one in which universal healthcare has been a key position; these stocks have taken a tumble. Because of this idealism, some healthcare names have seen their share prices beaten down to historic levels, catching the attention of value investors’. I illuminate why this is the buying opportunity of the decade.

Universal Healthcare

Health industry executives and investors have few reasons to worry about the so called health care reforms or a universal system proposed by Democratic presidential nominee Barack Obama. While Obama is endorsing a universal coverage system, it is unlikely that he will be able to convince a 49-49 political party deadlock in the Senate and the small 236-199 democratically led House to endorse such a plan.

In fact, democratic Senator Jay Rockefeller recently commented on the proposed healthcare reforms when he said “We all know there is not enough money to do all this stuff.”

History has revealed that wide comprehensive changes are hardly ever accomplished in Washington. This is particularly true when an issue as complex as social security, Medicare, healthcare, energy, and immigration. These have been hot button issues in presidential elections for years and while there has been progress, total reform has been futile. Using history as a guide seems to indicate the current pessimism on Wall Street regarding the healthcare industry, may prove to be overdone, especially with its strong fundamentals.

Strong Industry Fundamentals

Even amid fears of healthcare reforms and economic malaise the sector’s fundamentals are continuing to show resilience. More recently:

o U.S. consumer spending on medical care goods has started to move higher

o Consumer spending on health insurance as a percentage of total spending typically increases as retail sales growth falls, which has been a good sign for the managed health care group.

o Growth in real personal spending on prescription drugs has turned up

o The last time retail sales growth slowed substantially, the medical equipment industry performed relatively well

o Net profit margins in the pharmaceutical space appear to be moving higher

Balance sheets in the health care sector remain flush with cash, boosting the possibility of an increase in share enhancing stock buybacks and increased dividend payments

Recent Performance

The overall healthcare sector has bucked this trend in recent months as investors have sought safely in its stable earnings and attractive valuations. Healthcare’s momentum has been increasing more recently and is the only S&P sector showing a positive return in the last one and three months.

With overblown fears of a nationalized universal healthcare system, strong industry fundamentals, and healthcare’s recent tick upward now may be the time to buy healthcare names uniquely positioned to outperform in the coming years. I have selected three of my favorite and will follow this post up with details on all.

Tags: Healthcare