The healthcare sector has been under the spotlight for quite some time for a host of reasons —regulatory uncertainty, increasing consumerism and consolidation being the most prominent.
The recent deal of merger between two of the industry stalwarts Aetna Inc. (AET - Free Report) and CVS Health, once again points to increased activity in healthcare. The deal also testifies to the trend of joining two branches of the industry, in this case health insurance and pharmacy benefit management, to achieving diversification and economies of scale for affordable and convenient care.
Increasing Consolidation in Healthcare
Changing demographics, increasing regulatory restrictions, growing consumerism, need to control cost and attain speedier growth have necessitated unprecedented mergers and acquisitions in all subsectors of healthcare like hospitals, insurance and pharmaceutical.
The changing nature of the healthcare industry has encouraged companies to spread their operations so as to provide a bouquet of products and services and save cost at each touchpoint. The recent deal between Aetna and CVS Health is an excellent example of this. It qualifies as vertical integration, which would enable the surviving company to sell a range of services and products from drug to insurance cover.
A similar deal was made in 2015, when another insurance major UnitedHealth Group acquired Catamaran, a pharmacy benefit management company. The acquisition has proved highly accretive to UnitedHealth Group and contributed meaningfully to its results.
Changing demographics, which has resulted in an increase in the baby boomer population, which has fueled demand for Government programs such as Medicare and Medicaid, has also led to a number of mega mergers in the industry in recent years. The failed mergers of Anthem Inc. with Cigna Corp. and Humana Inc. with Aetna Inc. also belonged to this bracket.
Who Is the Real Gainer?
Increasing consolidation has led to a reduction in the number of players, greater market concentration and reduced competition, and increasing barriers of entry in the industry.
Though there’s a bit of ambiguity as to whether increasing consolidation has brought about welfare (in real terms) for consumers. However, the companies certainly stand to benefit from their increased size, putting them in a powerful position to negotiate with suppliers and consumers.
U.S. healthcare is a highly sensitive issue that has been gaining huge attention. Healthcare expenditure has been on the rise and though ways are being devised to control costs, a reversal in trend seems difficult to achieve. Companies in this space are thus set to thrive given continued demand for better healthcare needs.
Attractive Stocks to Pick
We therefore point out some stocks in the space that carry a strong Zacks Rank #2 (Buy) and have outperformed the industry’s decline of 0.6% so far this year. Adding these stocks to an investment portfolio will fetch smart returns.
CareDx Inc. (CDNA - Free Report) develops, markets and delivers a diagnostic surveillance solutions for heart transplant recipients. So far this year, the stock has returned a staggering 140.4%. The long-term expected earnings growth rate for the company is 20%. It carries a Growth Style Score of B and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
PRA Health Sciences, Inc. (PRAH - Free Report) operates as a global contract research organization, providing outsourced clinical development services to the biotechnology and pharmaceutical industries. It carries a Growth Style Score of B and a Zacks Rank #2. This year, the stock has rallied 47%. The long-term expected earnings growth rate for the company is 18%.
Diplomat Pharmacy, Inc. (DPLO - Free Report) operates as an independent specialty pharmacy in the United States. It aids in the dispensing, delivery, dosing and reimbursement of clinically intensive and specialty drugs. It carries a Growth Style Score of A and a Zacks Rank #2. This year, the stock has returned 45%. The long-term expected earnings growth rate for the company is 6.7%.