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March 14, 2018, 9:32 a.m. EDT

How stock-market investors can play health care’s latest merger mania

Start with Aetna, Allergan, the SPDR S&P Biotech ETF and the SPDR S&P Health Care Equipment ETF

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By Jeff Reeves, MarketWatch


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If you’re looking for a single piece of the stock market to hang your hat on, tech has been a popular choice. But there’s a fresh reason to now turn to the health-care sector, another big winner over the past decade.

Some big-picture trends are well known. Health care is recession-proof: Emergency room visits and heart attacks aren’t tied to overall economic growth rates, and that provides a strong baseline of revenue for health-care companies. There’s also a long history of above-average growth in the sector thanks to aging Baby Boomers. That’s on top of persistently high rates of inflation for medical spending across the board in the U.S., as our objectively overpriced health-care system squeezes more cash out of patients’ pockets.

These trends have long been driving strong performance for health-care stocks. Consider the Vanguard Health Care ETF /zigman2/quotes/207621102/composite VHT +1.29%  has surged 195% in the last 10 years while the broader S&P 500 /zigman2/quotes/210599714/realtime SPX +0.88% is up only about 110% in the same period. Other more aggressive pieces of health care like biotechnology have done even better; the SPDR S&P Biotech ETF /zigman2/quotes/205950134/composite XBI +1.85%  has leapt about 460% in the last decade.

But this year’s wave of big mergers give investors another reason to step into this sector.

That’s because an increasingly consolidated sector sets the stage for better pricing power thanks to reduced competition and bigger cost savings as operations are mashed up. On top of the longstanding appeal of health-care stocks as stable and growth-oriented businesses, this makes the sector a slam dunk in 2018.

Fewer players to share in bigger opportunities

The biggest recent example of health-care consolidation is Thursday’s $67 billion bid from insurer Cigna /zigman2/quotes/208431372/composite CI +2.00%  to purchase pharmacy-benefits manager Express Scripts .

Read: Cigna’s $67 billion acquisition of Express Scripts will change the way drug prices get calculated

In years past there was an odd dance between insurance companies negotiating with pharmacy-benefit managers, or PBMs, that administer the drug coverage portion of their plans. The PBMs then would negotiate with Big Pharma on drug prices.

The idea of this merger is simple: cut out the middle man.

In truth, this deal is a boon for Express Scripts shareholders — and not just because of a roughly 8% pop in shares on Thursday. Bitter negotiations with insurer Anthem Inc. /zigman2/quotes/203808743/composite ANTM +0.37%  fell apart last year, and the company warned that the insurer, its biggest partner, representing about 18% of the PBM’s revenue, would be walking away at the end of 2019.

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The move also is representative of a broader sector trend. In December, pharmacy giant CVS Health Corp. /zigman2/quotes/209664499/composite CVS +2.73%  announced it would shell out $69 billion for health insurance company Aetna . Though at the very end of the year, it was 2017’s biggest deal and was widely expected to reshape how health-care companies function — across insurers, dwindling PBMs, drugmakers and even health-care providers.

Anyone who has followed health care for even a short time has seen the impact of big shake-ups on other parts of the sector.

Look at the big drugmakers. From 1995 through 2015, 60 pharmaceutical companies got mashed up into just 10 leaders.

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US : U.S.: NYSE Arca
$ 221.09
+2.82 +1.29%
Volume: 252,112
Dec. 4, 2020 8:00p
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/zigman2/quotes/210599714/realtime
US : S&P US
3,699.12
+32.40 +0.88%
Volume: 2.59B
Dec. 4, 2020 5:11p
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/zigman2/quotes/205950134/composite
US : U.S.: NYSE Arca
$ 136.20
+2.48 +1.85%
Volume: 3.60M
Dec. 4, 2020 8:00p
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/zigman2/quotes/208431372/composite
US : U.S.: NYSE
$ 217.65
+4.26 +2.00%
Volume: 1.63M
Dec. 4, 2020 7:00p
P/E Ratio
15.26
Dividend Yield
0.02%
Market Cap
$78.63 billion
Rev. per Employee
$2.09M
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/zigman2/quotes/203808743/composite
US : U.S.: NYSE
$ 323.27
+1.19 +0.37%
Volume: 931,400
Dec. 4, 2020 7:00p
P/E Ratio
16.71
Dividend Yield
1.18%
Market Cap
$80.40 billion
Rev. per Employee
$1.48M
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/zigman2/quotes/209664499/composite
US : U.S.: NYSE
$ 74.50
+1.98 +2.73%
Volume: 11.96M
Dec. 4, 2020 7:00p
P/E Ratio
12.30
Dividend Yield
2.68%
Market Cap
$97.51 billion
Rev. per Employee
$884,748
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