Regardless of which party claims the greatest victory in November elections, Obamacare is likely to remain in place and so too will valuations of healthcare sector stocks, Morningstar stock analysts say in a new report.
The report, written by Morningstar healthcare sector analysts Damien Conover, Alex Morozov and Karen Andersen, acknowledges that the impact of government is important enough to influence investor sentiment within the sector, initially.
A GOP sweep would favor pharmaceutical and medical device firms, they say, while Democrats retaining power would bolster health care providers.
“However, the impact on individual stock valuations generally isn’t material regardless of who wins the election,” the analysts write.
Rather, the key catalyst for the entire sector will be the outcome of budget sequestration. A failure to avert automatic cuts to Medicare provider rates set to take effect at the start of 2013 will be a strong negative for sector stocks. Healthcare providers and life science research firms will be hurt the most, the former because already low reimbursement rates will further decline and the latter because an end to new NIH grants will suppress demand for life science research “instrumentation and consumables.”
“The sequestration’s main implication for the healthcare sector is a blunt 2% cut to Medicare provider rates, applied indiscriminately,” the Morningstar analysts write.
While a last-minute budget compromise remains possible, “election year politics and a lame duck Congress in the last two months of calendar 2012 shorten the window for a possible solution,” the analysts write, adding that as a result they “have started incorporating a sequestration scenario into our models.”
Consequently, valuation for a medical device firm like Medtronic (MDT), which has a relatively low level (23% of sales) of exposure to Medicare reimbursement, was cut just 5% by the Morningstar analysts, whereas Boston Scientific (BSX), with a higher level of Medicare exposure (33% of sales), was cut 15%.