President Trump promised to change the Affordable Care Act on the campaign trail. Terry Chong, Global Healthcare Analyst, TD Asset Management, talks with Sara D’Elia about what these proposed policy changes and the preliminary budget mean for health care stocks.
Well, the initial efforts at the end of March didn't come to a vote because of lack of support within the House. Currently the White House is negotiating with the House Republicans, hopefully to come to some compromise, to reintroduce a repeal and replace effort. However, it's quite uncertain at this point, with the busy calendar in the legislation, when this possibly could be introduced. But it's important in terms of potential tax savings that could come from the replace of the ACA at this particular time. So we're not too sure when it'll be introduced.
But it's on the table.
And the second piece is around the budget proposal. So what's going on there?
Well, the President's budget proposal came out also shortly after, and it incorporated an 18% reduction in the National Institute of Health research spending. And this is the sort of spending that supports 3,000 to 4,000 scientists within the US. And at this point, it would be catastrophic in terms of spending and research.
Now you mentioned when we were chatting that you don't think it's likely that these changes will happen, but if they do, what could it mean for stocks in the health care sector?
Certainly the health care companies provide equipment and supplies for these researchers who will be negatively impacted. But I don't believe it will occur because there's strong support within the Congress to supply research funds for the NIH.
Now, is it just researchers? So when you look at the sector as a whole, do you see implications across the board, or do you think there are subsections within the sector that would be impacted more or less?
I think, certainly, the negative impact on the equipment providers and supplies for research would be severe at this particular time.
And some of the winners?
The winners-- the other health care companies that provide products and services for patient care will be unaffected.
So if I'm an investor, and today I'm looking at putting some money to work in terms of health care stocks. How would you tell me to play the space?
I think with the current uncertainty we have to make sure that we pick companies that have strong balance sheets, that are diversified, and have high free cash flow.
Now if you had a top pick in the space, Terry, which stock would it be?
Within TD asset manager, Medtronic is held across several of the funds, and that's because it does fit the bill in terms that it's well diversified, has a strong balance sheet, and has high free cash flow. In terms of specifics with Medtronic, it's diversified across several different areas, cardiac rhythm management, pacemakers, implantable cardiac defibrillators, and also in terms of hospital care where you have minimally invasive therapies or restorative therapies that's used, and also in diabetes care.
And you actually mentioned that there is a specific technology around diabetes.
Correct, yeah. Medtronic has approval for the first closed-loop insulin delivery system that self-adjusts the insulin injections for type 1 diabetes patients. And that improves the outcomes with fewer injections for type 1 diabetes patients.
And I'm assuming this is your favorite, but has some risks involved. So what would be some of the potential risks that investors should consider?
Certainly within the health care space, pricing has always been an issue, and continues to be an issue and is a risk for Medtronic, that if there is increased pricing pressure, some of the payments that receive for, say, the diabetes pump, could go down.
Thank you very much.