Lazard Capital Best On The Street Analyst Proposes Stock Picks For New Health Care Legislation Pending In Congress
December 9, 2009 - The Wall Street Transcript has just published Consumer Health Services Report offering a timely review of the Health Services sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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TOM GALLUCCI joined Lazard Capital Markets in 2009 as the Senior Healthcare Services Analyst. Mr. Gallucci previously covered health care distributors, providers, PBMs and drugstores at Merrill Lynch and Bear Stearns for 13 years. In 2008 Mr. Gallucci was simultaneously named to the Institutional Investor All-America team in two categories, Healthcare Distribution/Technology and Healthcare Facilities.
Mr. Gallucci was ranked as a Healthcare Distribution/Technology Analyst by Institutional Investor annually from 2004 to 2008, and in 2003 he was an "Up-and-Coming Analyst." As an indicator of stock-picking abilities, Mr. Gallucci placed fourth in The Wall Street Journal "Best on the Street: 2008 Analyst Survey" and was named an Institutional Investor's "Home-Run Hitter" in 2001.
TWST: Which sectors of the health care services industry do you currently focus on?
Mr. Gallucci: I follow the drug distributors, the pharmacy benefit managers, the hospitals and the clinical labs.
TWST: With the recession and impending health care program in Congress, how does that bode for the industry sectors you cover?
Mr. Gallucci: Really, the impact of the potential legislation that's out there will have a different impact on most of the subsectors within health care. Regarding the ones that I cover, for the hospitals it's most significant. Hospitals today are, in effect, a safety net for the system. People that don't have insurance ultimately are often getting care at the hospital, and the hospitals themselves are typically incurring the majority of the cost there. So to the extent a reform ultimately reduces the number of uninsured, it could be a major positive for that industry, with the flip side being to the extent government budgets in the long run are overextended further, it could add some risks to hospitals or any provider that receives government reimbursement.
For clinical labs, they don't really have a lot of uninsured business or self-pay business like the hospitals would. But clearly to the extent more people get insurance, there could be increased utilization of the system, and it's possible that there could be more testing going through the system. Similarly, to the extent someone without insurance today is going to the hospital for their care, the hospital often is doing that lab test. The independent clinical labs like Quest Diagnostics (DGX); or LabCorp (LH) that I cover typically get their referrals from the doctor. So to the extent more people have insurance and they go to the doctor instead of the hospital for basic care, there could be a little bit more of the volume in the industry going towards the independent setting as opposed to the hospital setting. Also for the labs there is less of a risk on the Medicare reimbursement side, as they have a smaller percent of their business coming from Medicare, let's say, compared to hospitals. And they're also a much smaller piece of the total health care dollar in terms of spend.
For the drug distributors, it's probably the most straightforward of most any subsector out there. If there are more people with health care insurance and health care utilization goes up, including drug utilization, that would translate to more volumes through their system. On the other side of the coin, they don't really have any direct exposure to government reimbursement.
For the PBMs (pharmacy benefit managers), it's probably a little bit more complicated, but I see it as right now being a more neutral to positive event. The issue that really remains for the PBMs is where do people ultimately get their insurance? If more people have insurance and they get it through the private sector, there is probably a better chance that the PBMs will ultimately be a part of that equation, and they could see their membership go up, which would obviously be positive.
To the extent in the long run that there is sort of some type of a public option, then it's more of a question of would PBMs help administer the pharmaceutical benefit for the public option? If they do, what would the profitability look like? And of course, if they don't service the public option, then there would be a lack of upside if more people got their insurance through the public option. The negative scenario for PBMs would be in the long run if you've got people who currently have insurance ultimately get insurance from another source, like a public option that the PBMs do not touch. Then you could actually see the membership go down. But I see that risk as being very minimal with what's on the table right now.
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