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S&P Equity Research Issues Health Care Sector Predictions for 2011

NEW YORK, Jan. 13, 2011 /PRNewswire/ -- Although 2010 brought healthcare reform, investors are wondering if 2011 will bring healthcare reform repeal.  Investors should likely expect some volatility in the sector, as the Republican-led House promises to wreak havoc on healthcare reform, either through a repeal effort or withholding funding for portions of the law, according to analysts at Standard & Poor's Equity Research.

"Healthcare reform or challenges to it should not be the only issue Health Care sector investors should focus on," said Jeffrey Loo, Health Care Group Head at S&P Equity Research. "Aside from our expectation of continued M&A activity within various sub-sectors including managed care, facilities, pharmaceuticals, and life sciences, there are other issues and trends we believe investors should keep a careful watch on in 2011."

These issues and associated projections by S&P's Health Care equity analysts for 2011 are as follows:

  1. We believe ongoing economic challenges across Europe will continue to adversely affect several sub-sectors, particularly the pharmaceutical, medical devices, and life sciences sub-sectors.  Pharmaceutical companies will likely continued to be impacted by budget cuts, typically through mandated price reductions, regulations to limit utilization, therapeutic substitution, and greater use of inexpensive generics.
  2. Although we expect the legal battle to regulate gene patents to continue, we believe that such rulings have the potential to re-shape the diagnostic area more than in drug development, as the latter's manipulation of DNA remains patentable.  
  3. After years of foreboding, the daunting specter of patent expirations on a large number of blockbuster drugs is now upon the pharmaceutical sub-sector, with the global pharmaceutical industry facing a cumulative loss of $80 billion of sales from 2011 to 2014, according to IMS Health.  Since many of the patents expire in late 2011, we expect the losses to have only a relatively small impact on the group in 2011, with the brunt being felt in 2012.  
  4. We estimate that physician office visits declined 5% to 7% in 2010, as the uninsured population rose and even the insured delayed doctor visits to avoid rising co-payments and deductibles.  Assuming a stable environment and a belief that patients can only delay doctor visits and necessary procedures for so long, we expect stabilization and a modest recovery in doctor visits and procedures in 2011.  We believe the main beneficiaries will be healthcare service providers including clinical laboratories, diagnostic test manufacturers, and drug and medical device makers.
  5. In 2010, the FDA approved 21 new drugs, down from 25 in 2009 and 24 in 2008.  We believe the lower number of approvals reflects the FDA's continued increased scrutiny on safety issues, and we expect much of the same in 2011.  Although FDA approval typically coincides with its panel's recommendation, recent history proves there are no guarantees, and we believe investors should not assume a drug's approval based on an FDA panel recommendation.
  6. Pharmaceutical manufacturers are increasing their focus on global emerging markets to provide impetus for top-line growth in coming years.  Factors spurring growth in these markets include as these countries develop, their populations becoming subject to ailments and conditions that typically affect developed nations.  These include poor health behaviors, such as drinking alcoholic beverages, smoking, and rising levels of obesity, which in turn can lead to cardiovascular disease, cancer, diabetes, respiratory ailments, and other maladies.  We believe these situations provide multinational pharmaceutical manufacturers with opportunities to tap large, new customer bases.
  7. We believe generics will remain a strong sector in 2011, following a fairly robust showing in 2010.  Key growth drivers include a record number of patent expirations on widely prescribed branded drugs, and mounting pressure from government and private industry third-parties for greater use of less expensive generic drugs.  
  8. With respect to new drug approvals in 2011, we anticipate the launch of Benlysta, which is being developed by Human Genome Sciences Inc. (HGSI 27 ****) and GlaxoSmithKline plc (GSK 39 ***) for lupus; and telaprevir, whose lead developer is Vertex Pharmaceuticals (VRTX 37 *****), for Hepatitis C.
  9. With the Republicans having taken control of the House of Representatives in 2011, we expect various efforts to derail the healthcare reform law.  These could include a repeal effort, which, in our opinion, would be more of a symbolic gesture versus one that is based on reality, as Democrats retained control of the Senate and President Obama has veto power.  Other more likely efforts include withholding funding for the establishment of various programs or restricting expansion of Medicaid.  Opponents have also pursued lawsuits challenging the constitutionality of certain provisions included in the reform bill, particularly the individual mandate requiring the purchase of insurance or paying a fine.

About Standard & Poor's Equity Research ServicesAs the world's largest producer of independent equity research, Standard & Poor's licenses its research to global institutions for their investors and advisors.  Standard & Poor's team of experienced U.S., European and Asian equity analysts use a fundamental, bottom-up approach to assess a global universe of multi-asset class securities across industries worldwide.  Follow Standard & Poor's equity analysts' U.S. market commentary each day at

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This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you nor is it considered to be investment advice. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.

This material is based upon information that we consider to be reliable, but neither S&P nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. With respect to reports issued to clients in Japan and in the case of inconsistencies between the English and Japanese version of a report, the English version prevails. With respect to reports issued to clients in German and in the case of inconsistencies between the English and German version of a report, the English version prevails. Neither S&P nor its affiliates guarantee the accuracy of the translation. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Neither S&P nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

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