Next week, everyone with a stake in the outcome of the battle surrounding President Barack Obama’s health-care plan will show up in Washington as the Supreme Court kicks off three days of oral arguments over the constitutionality of that legislation. Health-care companies will find their fortunes are shaped by the eventual outcome, but investors in these stocks have more immediate worries.
The fourth-quarter earnings season has wrapped up, and it will be another three or four weeks before we see the first major earnings announcements for the three months ending March 31. That gives investors several weeks in which they can brood and fret over the outlook for health-care stocks.
Not a single one of the 16 health-care companies in the Standard & Poor’s 500-stock index that issued guidance on their first-quarter results took an optimistic perspective. Indeed, of that group only two – Cerner (CERN) and CR Bard (BCR) – didn’t use their fourth-quarter earnings release and subsequent earnings conference calls to guide analysts’ estimates lower, reports Gregory Harrison, corporate earnings research analyst at Thomson Reuters.
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The companies warning investors that their earnings weren’t going to measure up included pharmaceutical giant Merck (MRK), which predicted earnings per share likely would fall 4.5 percent below expectations, to around 96 cents a share. But the majority of the health-care businesses lowering their outlooks weren’t Big Pharma companies but makers of medical devices or providers of other health-care services or equipment. Cardiovascular device-maker St. Jude Medical (STJ) was one of those issuing negative guidance, forecasting a small shortfall. Its CEO had previously commented that the market for implanted cardiac defibrillators is in the doldrums.
Another company that is involved in this business, Boston Scientific (BSX), warned of the largest potential earnings shortfall for the first quarter. It cautioned its actual earnings may fall some 40 percent below analysts’ consensus forecasts of 10.8 cents a share. Boston Scientific announced earlier this month that it has agreed to purchase Cameron Health, a privately owned company that has developed an alternative to traditional defibrillators, in hopes of jump-starting its revenues from this quarter.
Still, Harrison says that most of the companies who warned of earnings “misses” in the first quarter shied away from attributing those shortfalls to any specific cause. Oddly, there appears to be no common thread. Rather, companies cited a list of the usual suspects: the economic malaise in Europe, a slowdown in demand in Asia, ongoing economic uncertainty within the United States, or foreign exchange headwinds.
The real common thread may be one that they don’t like to discuss, and that ties into the reasons the Obama administration is pushing so hard for the health-care act to survive the constitutional challenges it faces. Health-care costs have soared at rates that greatly exceed the official rate of inflation. Insurers are scrambling to keep up – in the last decade, a health care policy for New York residents buying their own insurance that once cost $600 might now require monthly premiums of $1,500 – but the combination of the recession and pushback by hospitals and other providers has put downward pressure on prices.
Take the market for all kinds of implanted devices, from the defibrillators mentioned above to hip or knee implants. Hospital customers are trying to trim costs and are resisting paying higher prices even for newer, more bleeding edge products. There is a similar pattern in the pharmaceutical industry, where insurers and consumers alike are increasingly likely to switch into generics as patents expire on a number of blockbuster drugs. To the extent that the new health-care law – most of whose provisions would take effect in 2014 – puts some constraints on the extent to which an insurer or hospital can pass on the ever-rising costs of medical devices and drugs to the end user, in the form of direct bills or higher premiums, that’s only going to be another downside.
Health-care companies themselves are warning us that they’re heading into turbulent waters. Unless and until they begin to guide those earnings estimates higher – or we start seeing some unexpectedly positive surprises from them – there are plenty of alternatives that will leave your portfolio much healthier.
