Leaf through a passel of investment research reports on
health-care companies and a singular message resounds: buy, buy,
Zoll Medical Corp., Cerner Corp., Haemonetics Corp., Kinetic
Concepts Inc.: the list of unfamiliar names goes on and on.
Many are smaller concerns focused on narrow niches of a
fast-changing marketplace. But expectations are running high for
these and other health-care companies, with predictions of
double-digit growth rates.
Some companies could see earnings increase as much as 35
percent as health-care reform unbridles opportunities for those
that provide quality - and save money.
But beware. Not everyone will emerge a financial winner.
"Investors have got to be extraordinarily selective in their
stock choices," said Jonathan Osgood, a securities analyst with
Alex. Brown & Sons Inc. in Boston. "It's a minefield out there."
Thirty-nine health-care and biotech companies went public in
the first three quarters of the year, raising about $1.13 billion,
says researcher Securities Data Co.
Last year, a record 109 health-care and biotech companies
launched initial public offerings that brought in $4.6 billion.
As fee-for-service medicine fades into the background, managed
care, with its emphasis on cost containment, is transforming health
care. Doctors are banding together to form large group practices.
Hospitals are providing more outpatient care because fewer medical
procedures require overnight stays.
Companies that provide off-site care, in-home care,
prescription drugs by mail, computer software that eliminates
workers and paper, drugs and devices that avert surgery, will
flourish in the new environment. But they must demonstrate that
their product or service lowers costs and improves patient outcomes.
"Companies are going to go wrong if they ignore the fact that
they . . . have to have hard data showing cost effectiveness,"
David Saks, an analyst with Gruntal & Co., said investors
should only put money into companies that "clearly can document
products that have a real benefit of enhancing quality of life and
. . . save real money."
Investors should be skeptical of companies that proclaim "We
save money in the health-care system" without proof.
Health maintenance organizations, founded on the notion of
cost-conscious care, have been in the vanguard by requiring primary
care physicians to serve as "gatekeepers," sanctioning referrals to
pricey specialists and monitoring overall patient care.
"HMOs have been creating most of the changes," Osgood said. For
that reason, HMO companies like United Healthcare, US Healthcare
and Value Health are well positioned, he said, at least over the
next few years.
Saks predicted it will take "a couple of years of shakeout
before we see which companies are going in the right direction."
That means many promising forecasts will have to be redrawn.
Some already have been scaled back.
For example, Bernard McDonagh, a managing director at Piper
Jaffray Inc., a Minneapolis-based investment firm, lowered his
growth projection for HealthCare Compare-Affordable. The company
provides managed-care services to discounted networks of doctors to
large companies, from 30 percent to 20 percent. …