Economy could lift drug, device firms

The U.S. economy is showing signs of bouncing back and, if it does, look for drugmakers and medical-device companies to benefit. But if the economy has another summer stall like last year, expect health insurers to benefit.

That’s the outlook of Les Funtleyder, a health care mutual fund manager at Miller Tabak & Co. in New York.

In the last two years, Americans have cut back their doctors visits and elective surgeries more than many anticipated. That helped health insurers such as Indianapolis-based WellPoint Inc., which priced their policies expecting to pay more medical bills. When they didn’t, the companies pocketed the cash as extra profits.

At the same time, hospitals and makers of surgical implants—such as the Warsaw-based orthopedic companies—have been hurting as patients have scheduled fewer lucrative surgeries.

But the tables soon could turn if Americans regain their economic confidence. If fewer are out of work or afraid of losing their jobs, more will likely schedule those hip and back surgeries they’ve put off the past two years.

“As employment improves, it is likely we will see an improvement in utilization-centric companies,” Funtleyder wrote in a full-year outlook report to investors on Feb. 16.

Still, Funtleyder expects this improvement to be gradual, which probably means WellPoint and its peers will enjoy thicker profits for most of the next year.

“We believe there is a 2-3 [quarter] lag between employment and utilization, so the positive impact should mostly be seen at the end of ’12,” Funtleyder wrote.

Hospitals also would benefit as patients seek more health care, but that may not prove out this time, Funtleyder warned.

“Facilities will see continued pricing pressure and the trend for reduced inpatient days should continue,” he wrote.

Pharmaceutical companies like Indianapolis-based Eli Lilly and Co. would also benefit from higher health care spending by patients. But the fortunes of Lilly and its peers hinge much more on getting new drugs launched—something Lilly has struggled with mightily recently. Its future depends on that changing.

“We feel that there is upside potential in large pharma because their pipelines, which were relatively empty in the past few years, are filling up again due to faster than anticipated innovation,” Funtleyder wrote.