The Week Ahead In Healthcare (August 20)

By Stephen D. Simpson, CFA | August 21, 2012 AAA

Healthcare investors should enjoy the respite in the healthcare sector over the next few weeks. Once the calendar turns to September, major conferences start again, early earnings warnings will begin to pop up and analysts and investors in general will start to pay a great deal more attention to the companies and stocks. Likewise, while the FDA's calendar is relatively empty this month, activity ought to be picking up shortly.

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A Major Deal Ten Years in the Making
Investors woke up August 20 to a story in the Wall Street Journal that claimed health insurance companies Aetna (NYSE:AET) and Coventry Health (NYSE:CVH) were very close to a deal. Only a relatively short time later, the companies confirmed the news and announced their intention to do a deal.

Assuming that the deal goes through, Aetna will acquire Coventry in a $5.7 billion deal. With the debt already on Coventry's balance sheet, it's actually a $7.3 billion deal. The deal is a mixed cash and stock transaction that presently values Coventry at $42.08, a price that gives investors a 20% premium to August 17's close. Coventry shareholders will get $27.30 per share in cash from Aetna, as well as about 0.39 shares of Aetna.

Somewhat similar to WellPoint's (NYSE:WLP) deal for Amerigroup (NYSE:AGP), this deal will increase Aetna's exposure to government insurance programs, as Coventry has a sizable Medicare Advantage, Medicare Part D and Medicaid business. Coventry has recently discussed more challenging trends in commercial insurance, while the medical costs in its Medicaid businesses have been looking better.

This deal was long in the making, but not at all surprising. Coventry has been seen as a prime takeover target for most of the last decade, and many investors/analysts seemed to regard it more as a "when and who" question. As I have written before, changes in the U.S. health insurance market are placing a premium on size, and it is very much in the interest of large players to get as large as they can.

SEE: Trademarks Of A Takeover Target

Medtronic Earnings on Tap
Investors will also be paying close attention to Medtronic's (NYSE:MDT) quarterly earnings announcement August 21. While having such a large player in med-tech report off-calendar quarters does tend to mess up the modeling a bit, it will also give investors something of a mid-quarter update on major markets like cardiac rhythm management, stents, spine, neuromodulation and diabetes. Consequently, investors in companies like St. Jude Medical (NYSE:STJ), Boston Scientific (NYSE:BSX) and Abbott (NYSE:ABT) ought to be tuning in to the numbers. Also, expect investors to be keenly interested on what management has to say about projects and programs like its transcatheter valve and renal denervation.

SEE: Earning Forecasts: A Primer

Generic Actos Hits the Market
On August 17, Teva (NYSE:TEVA), Mylan (Nasdaq:MYL) and Ranbaxy announced the commercial launch of generic forms of Takeda's Actos (pioglitazone). Actos was a major diabetes drug for Takeda, bringing in close to $3 billion in the U.S. If this launch follows the typical pattern, pricing will probably be around 50 to 67% of the branded price for the 180-day window of exclusivity, with the price likely to fall as much as 80 to 90% in a year or so.

The Bottom Line
Although this has been a solid year for med-tech, some sub-sectors are starting to lag a bit during this late summer rally. The Health Care Select Sector SPDR (ARCA:XLV) is up 12.08% year-to-date, below the the 13.2% return of the S&P 500. The iShares Dow Jones U.S. Pharmaceuticals ETF (ARCA:IHE) is up 13.75%, while the iShares Dow Jones US Medical Devices ETF (ARCA:IHI) is up 11.9%. The SPDR Biotech ETF (ARCA:XBI) continues its tear, having risen almost 30.5% year-to-date.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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