Healthcare Sector Shows Profit in 2nd Quarter

Pending Reforms, Expirations Put Drug Makers on the Defensive
   (BUSINESS WIRE) - 9/11/2010 - According to a recent special report from Fitch Ratings, the U.S. healthcare sector's second quarter 2010 results were affected by a persistently weak economy, looming patent cliffs, and healthcare reform.
  Patient utilization among the for-profit hospitals operators continued to be down, negatively affecting volumes. However, a low cost-inflation environment, cost-cutting and containment efforts, and continued strong commercial insurer reimbursement trends attributed to another quarter of strong profitability. As a result of this trend, six of Fitch's seven rated for-profit hospital operators have been assigned a Positive Outlook or placed on Rating Watch Positive this year.
    Branded pharmaceutical issuers face an unprecedented volume of drug patent expirations over the next few years, as several of the world's best-selling drugs come off patent. Many of these companies have initiated large cost-cutting programs, the affects of which are beginning to be seen more in the financial statements. Issuers with the largest exposure to patent expirations include Bristol-Myers Squibb Co., Eli Lilly and Co., and Pfizer, Inc.
   The pharmaceutical industry faces a tough road ahead given tighter government reimbursement around the world, including U.S. healthcare reform, Japanese biennial price cuts, and expanding European austerity programs. Additionally, in August the Centers for Medicare and Medicaid Services issued its final rule for its new bundled end-stage renal disease (ESRD) prospective payment system.
   This new system will decrease Medicare's reimbursement for ESRD services beginning in 2011 and has the potential to pressure margins for ESRD providers, like DaVita Inc., and to affect the profitability of ESRD-related drugs, such as Amgen, Inc.'s Epogen and Johnson and Johnson's Procrit. Details surrounding the further-reaching Patient Protection and Affordable Care Act and its execution remain to be established and may be affected by November's elections.
   Fitch's second quarter "Healthcare Stats Quarterly" report provides a summary of the operating performance and credit metrics of the companies in Fitch's rating universe of this sector over the past four years, as well as key credit strengths and concerns and a summary of the companies' liquidity positions, including debt maturities, as of the end of the second quarter of 2010. The report is available on the Fitch website at www.fitchratings.com.

Photo by Steve Rensberry (c) 2014