Each week, a professional investor tells us where he'd put his money.This week:Paul Major of the BB Healthcare Trust.
Three topics currently dominate our thoughts because they could profoundly affect the healthcare industry. These are the proposal to "repeal and replace" the Affordable Care Act (ACA, or Obamacare) in the US, the reality of Donald Trump's promise to tackle "high" drug prices, and the question of what shape his long-awaited tax plan will take (for example, whether he might slash corporation tax from 35% to 15%).
Drug pricing has been a hot topic for several years. Thus far, any attempt at direct government action has floundered. The past three administrations have looked at this topic, and found little support from Congress for government to play a more direct role. While President Trump may Tweet that he is "working on a new system where pricing for the American people will come way down!", the legal pathway to facilitate this remains unclear. He has also recognised that innovation needs to be rewarded. So we are at a point where the share prices of many drug firms are pricing in what we consider a worst-case scenario.
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With the details of US healthcare reform still largely uncertain, and valuations relative to the wider market depressed relative to history, this is an interesting time for the industry and a great opportunity for long-term investors.
Our investment strategy is unchanged: high-conviction, unconstrained, long-only positions with a maximum of 35 stocks. However, when we decide how to weight our portfolio, we believe that a balance that skews toward those firms that could benefit from reforms is preferable. Each of the following stocks have merit in their own right under the status quo, but their options for benefiting from these changes could prove very valuable.
On 6 March the Republicans unveiled their long-awaited replacement for Obamacare. Unsurprisingly, this met with mixed reactions. For health insurers such as Anthem (NYSE: ANTM) the new legislation is positive. It both reverses the taxes that Obamacare imposed on them and puts insurers at the forefront of plans for individual coverage.
Retailer Walgreens Boots Alliance (Nasdaq: WBA) is largely protected from Trump's healthcare reforms. The company has been refreshing the Walgreens brand in the US, focusing on higher margin cosmetic products, and using its pharmacy operations to drive footfall into stores. Pricing for drugs may change, but demand will only rise. Healthcare remains an attractive long-term growth story as the population ages.
Wholesaler AmerisourceBergen (NYSE: ABC) should be a significant winner from any sort of tax reform. Compared with its peers, ABC looks best positioned for a transition to a fee-per-service model rather than the current situation where distributors have relied on drug price increases to bolster profits.
Paul Major is co-manager of the BB Healthcare Trust
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