With the Fourth of July holiday coming smack in the middle of the week, this week is likely to be light on news and investable events for investors. Trading volumes will likely be thin, and there are no scheduled announcements of any significance.
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Will Glaxo up Its Bid?
GlaxoSmithKline (NYSE:GSK) ended last week by extending its tender offer to acquire Human Genome Sciences (Nasdaq:HGSI), but has not increased its bid beyond the original $13 per share. With Human Genome shares trading just above $13, it seems that investors have only modest confidence that a higher bid will come, though RBC's Michael Yee recently published a note suggesting that a higher bid (of $15 per share) could be on the way.
Human Genome's fair value to Glaxo is an interesting question today. Anthera Pharmaceuticals (Nasdaq:ANTH) recently reported disappointing Phase three trial results for its would-be lupus drug, raising the scarcity value of HGSI's Benlysta (which Glaxo markets under its partnership with HGSI). That said, Benlysta demand and revenue has thus far been disappointing. With a high-risk/high-potential pipeline, Glaxo may need to consider contingent value rights (CVRs), as Sanofi (NYSE:SNY) used in its deal for Genzyme, to get the deal done.
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Assessing the Fallout from the Supreme Court Upholding "Obamacare"
Investors were not slow to react to word that the Supreme Court of the United States ruled to uphold the Patient Protection and Affordable Care Act ("Obamacare") in a closely-watched case. That said, it is likely that analysts and investors will still be adjusting their positions and outlooks in the wake of this news.
Broad insurance coverage for the U.S. population ought to be a meaningful positive for U.S. hospitals like HCA Holdings (NYSE:HCA) and Health Management Associates (NYSE:HMA). Hospitals are required to treat anyone and everyone who shows up in their emergency rooms, regardless of the ability to pay. Uninsured patients, then, are often presented with serious medical needs and with little ability to pay, which ultimately leads to higher bad debt expenses for the hospitals.
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This is also likely to be a positive development for drug and diagnostic companies. Both are likely to benefit from an increased number of doctor visits for basic and preventative care; visits that often lead to tests and/or new prescriptions. Generic makers like Teva (NYSE:TEVA) could see improved generic prescription volume, while women's health specialist Hologic (Nasdaq:HOLX) could see improved demand for basic preventative care like routine HPV screening.
The news is not so good for medical device companies. Increased patient volume does not offer much incremental revenue potential; devices like hips and ICDs are generally implanted as parts of scheduled surgeries that are already paid for with private insurance, Medicare or Medicaid. What's more, the industry is faced with a 2.3% excise tax that begins next year.
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The Bottom Line
With the tax based on revenue and with little ability for small companies to push through higher prices, larger companies like Medtronic (NYSE:MDT) with more operating leverage will likely be better-positioned to absorb the tax. This could push down valuations for smaller med-tech companies and lead to another wave of mergers and acquisitions or consolidation in the sector.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.