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These Health Care Stocks May Show Signs of Life Under ObamaCare

No one knows what form the all-but-certain overhaul of health care provision will take or what impact it will have on our own health or the health of the economy. Maybe you'll have a stroke after discovering how much the system costs and find out how well it works firsthand.

One widely held belief is that shares of drug makers and providers of medical equipment will be feeling poorly after ObamaCare is ushered in. Profit margins are expected to be eroded as authorities try to force down treatment costs and as new layers of regulation reduce productivity.

That helps to explain the sector's underperformance this year. The Vanguard Health Care exchange-traded fund is up about 5 percent in the last six months, well below the 15 percent rise in the Standard & Poor's 500-stock index.
Kimberly Scott, manager of the Waddell & Reed Advisors New Concept Fund, does not entertain high hopes for the success of a federalized health care system - "it will be a huge depressant on our economy because we won't do it right," she predicted - or for the investment prospects of most companies in related industries. But certain niche businesses may thrive, she said, and portfolios that hold their stocks may see their condition perk up.

Scott favors "small, innovative companies that are attacking categories of care where needs are not fully being met." One example she cited is NuVasive, which has developed products and equipment for conducting spinal surgery from the side rather than through the back, a method that greatly improves patient care, she said.

Another provider of better medical mousetraps is Intuitive Surgical. Its surgical robots are very expensive, she conceded, but the enhanced productivity and improvement in patient care that they provide make them useful investments for hospitals. Scott's choices include companies whose operations are likely to be affected minimally, if at all, under Health Care 2.0, such as Allergan and Henry Schein.
Allergan, a specialist in the vanity side of health care, makes eye and skin care products and others that go a bit deeper, including Botox and breast implants. Henry Schein distributes a variety of dental products and equipment.

Another preferred segment of the field comprises suppliers of medical consumables. Companies like C.R. Bard and Dentsply International sell comparatively cheap, everyday products used by doctors and dentists, respectively.

Bard is "not an incredibly high-level R&D-driven company, but it's always tweaking products enough that they continue to improve," Scott observed, describing its business as "evolutionary, not revolutionary."

The cheap, humdrum nature of Bard's and Dentsply's wares should allow them, she said, to "fly under the radar screen of the reimbursement police" that soon may be patrolling more vigilantly. Large pharmaceutical companies and medical equipment makers, by contrast, can expect the heightened scrutiny to leave them firmly in the sights of the authorities.

That's why her prognosis is so much brighter for smaller businesses. "I can't say I'd want to be Pfizer or Lilly trying to improve margins and deliver innovative products" once a national health care program is created, Scott remarked.

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