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US healthcare:

what changes will the presidential election bring?

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William Ball

Fund Manager, Sanlam UK

In the United States, healthcare is big business – the country has the largest healthcare system in the world. The figures are staggering: the US spends 16% (or a whopping US$3 trillion) of its annual GDP on healthcare. If we compare this to other countries like China at 5.5% of GDP and the UK at 9%, one gets a better perspective of how large this market is. In addition, the US accounts for around 40% (US$425 billion) of global pharmaceutical sales and 44% (US$190 billion) of global medical device sales. The sheer size of the US healthcare system makes it the most important market for most major global healthcare businesses.

The healthcare services market in the US has historically been expensive and deeply flawed, with 8% of Americans still not able to afford healthcare insurance. President Barack Obama attempted a radical overhaul with his controversial Affordable Care Act (ACA or Obamacare), which sought to expand the coverage of health insurance and increase health insurance quality and affordability. However, the implementation of Obamacare has been plagued with challenges, and both 2016 US presidential candidates are likely to propose fundamental changes. Still, it may prove even more challenging to get these passed through the House of Representatives and the Senate.

As the Sanlam Private Wealth (SPW) global equity team, we view healthcare as an appealing sector and are already invested through Roche and Medtronic, among other stocks. So we have a keen interest in how a Clinton versus Trump win could impact the US healthcare industry. Hillary Clinton broadly supports ACA, and if she wins, is likely to strengthen the current legislation. Donald Trump, on the other hand, will go to the other extreme, attempting to dismantle ACA as it exists today and completely overhauling it if possible. So the party that will gain control of the White House, Senate and House of Representatives will be the single most important element in predicting the outcome for ACA. But with neither likely to take out-and-out control, it’s probable that no significant reform will happen in the foreseeable future.

Having said this, it does look like there will be some significant changes to Obamacare over the longer term. There could be implications for pharmaceutical stocks as pricing comes under scrutiny. Within the pharmaceutical sector in particular, we favour biopharmaceutical businesses that have portfolios and pipelines for therapies targeting unmet patient needs and serious illnesses. Roche is an example of one such stock that we hold. Driven by its hugely successful and clinically effective blockbuster drugs – Avastin, Rituxan and Herceptin – Roche has become a global leader in oncology therapies.

We also believe the need for efficiencies to improve the quality of care will accelerate the adoption of new and innovative technologies. Medtronic, which we bought in 2015 and which has outperformed the market by 16% in US dollar terms, has been an excellent addition to our portfolio. The company places an emphasis on strategic customer relationship and shared accountability for outcomes, enabling it to provide cost benefit solutions to healthcare providers. Overall, we see minimal impact on medical devices from any government initiatives.

It’s an interesting time in US history and the healthcare industry is right at the heart of many fundamental policy talks and campaign promises. We believe this is a good time to consider some long-term investment opportunities in certain well-considered stocks in the US healthcare system.

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