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Buy These 3 Stocks as Healthcare Continues to Shift Gears

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The recent announcement by Cigna Corp. (CI - Free Report) to acquire pharmacy benefits manager, Express Scripts Holding (ESRX) corroborates the fact that the healthcare industry is shifting gears.

The coming together of two different sections (health insurers and the pharmacy benefit managers) of the healthcare space asserts that business boundaries are getting blurred. Healthcare companies are making concerted efforts to transform themselves into comprehensive healthcare providers, a one-stop solution for their customers.

Recent Spate of Deals

The first deal of this kind was CVS Health's acquisition of Aetna, announced last December. The transaction, valued at nearly $77 billion, is slated to go through in the second half of 2018.  Following this news, UnitedHealth Group Inc. (UNH - Free Report) announced the buyout of the primary and urgent care services of DaVita Inc. for nearly $5 billion.

However, UnitedHealth can be considered a pioneer in this aspect, having acquired Catamaran, a pharmacy benefit management company in 2015. The buyout has proved highly accretive to UnitedHealth and contributed meaningfully to its results.

What’s the Driving Factor?

Pressure to slash costs to protect margins and the need to counter growing competition are the primary catalysts for the merger and acquisition wave sweeping through the industry.  

Insurers are under pressure to protect margins due to high medical cost, growing consumerism and high regulations. Meanwhile, pharmacy benefit managers (PBMs) are facing the prospect of fierce competition especially given that the tech giant, Inc., is making inroads in the pharmacy business. Amazon recently announced a joint venture with JPMorgan Chase and Warren Buffett's Berkshire Hathaway in order to curb medical costs for their employees.

Teaming up with other forward or backward integrated companies consequently seems the best survival strategy to provide businesses with additional strength and a wider spectrum.

Given the vertical integration nature of these deals, odds of getting a clearance from regulators seem high. Cigna’s merger with Anthem Inc. (ANTM - Free Report) and Aetna’s with Humana were blocked by regulators last year, on concerns that the combination would stifle competition in the healthcare industry since both the companies had overlapping businesses.

The Impact of These Combinations

PBMs provide a wide range of services including formulary management, Medicare Part D services, mail order, specialty pharmacy and infusion services,. It also provides retail pharmacy network management services, prescription management systems, clinical services, disease management services and medical spend management. They function to negotiate of prices with drugmakers looking for additional rebates and discounts so as to lower out-of-pocket costs for consumers.

Their clients include insurance companies with the focus on providing drugs that are beneficial as well as cost-effective. Tie up with PBMs better equips health insurers to negotiate discount with drug manufacturers which should lower insurers’ medical costs.

These combinations should be well-positioned to cater to the health needs of populations especially the 50% of Americans with chronic conditions that account for more than 80% of all health care costs. Getting vertically integrated would better equip health  insurers to provide superior healthcare services at reasonable costs, by ruling out duplication of services and playing a more direct role in medical services.

Consequently along with providing growth opportunities for business these evolving entities would also better serve customers. Such changes therefore bode well for both the consumers and the producers.

U. S. 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.

Promising Stock Picks

We therefore point out some stocks in the space that carry a strong Zacks Rank #1 (Strong Buy) or 2 (Buy) and have outperformed the industry’s growth of 34.5% in a year’s time. Adding these stocks to an investment portfolio is likely to fetch smart returns.

Centene Corp. (CNC - Free Report) is a diversified, multi-national healthcare enterprise that provides a portfolio of services to government sponsored and commercial healthcare programs, focusing on under-insured and uninsured individuals.

In a years’ time the stock has returned 45%. The stock has a Value Style Score of A and a Zacks Rank #1. The stock has witnessed the Zacks Consensus Estimate for current-year earnings being revised 6.5% upward over the last 30 days.  The company beat earnings estimates in the trailing four quarters with an average positive surprise of 9.8%.  You can see the complete list of today’s Zacks #1 Rank stocks here.

UnitedHealth, the leading health insurer offers the full spectrum of health benefit programs for individuals, employers, military service members, retirees and their families. It also covers Medicare and Medicaid beneficiaries, and contracts directly with the physicians and care professionals, and hospitals and other care facilities nationwide.

In a years’ time the stock has returned 34%. It has witnessed the Zacks Consensus Estimate for current-year earnings being revised 13.3% upward over the last 60 days.  The company surpassed earnings estimates in the preceding four quarters with an average positive surprise of 4.8%.

Anthem a health care company which provides medical products, through its subsidiaries. It operates through Commercial, Consumer and Other segments.

In a years’ time the stock has returned 41%. It has witnessed the Zacks Consensus Estimate for current-year earnings being revised 14.1% upward over the last 60 days. The company surpassed earnings estimates in the last four quarters with an average positive surprise of 9.6%.

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