Morningstar Advisor - August/September 2010 - 30

Spotlight

Reform’s Impact on Other Health-Care Industries
Managed Care While a significant amount of uncertainty still exists for managed-care organizations, health-care reform’s insurance mandate will likely bring a large group of new customers. These new customers help offset the higher fees and costs that the government is forcing on health insurers. Further, we believe that the large and diversified managed-care organizations, such as UnitedHealth Group UNH and WellPoint WLP, offer strong upside—investors are focusing more on the negative implications of reform rather than the complete outlook for managed-care organizations. Medical Devices We believe that medical-device firms are in a position to pass on some of the higher taxes and fees associated with health-care reform to payers. Hospitals, however, are under increasing pricing pressure, and they will be targeting device companies for price concessions. Therefore, the increased volume that reform will likely bring may not offset the medical-device industry’s increased costs. Medical Instruments The large group of new patients demanding health care should increase the demand for medical instruments. Because medical-instrument companies face only minor cost increases under the new regulations, we expect that the group will largely benefit from increased use of the health-care system. Biotechnology Similar to our analysis of the pharmaceutical industry, we expect health-care reform to have a neutral impact on biotech companies. Increased industry fees will likely be offset by higher demand for biologic drugs. However, the magnitude of the fee increase and offsetting biologic demand is smaller than it is for the pharmaceutical industry. Regarding generic biologics, the 12-year exclusivity period was a major industry win and should help keep generic biologics at bay for a long time. Services Like the diagnostics labs, most companies in the services industry should feel a significant tailwind, because demand for health-care increases as the amount of insured patients increases. Also, most services firms face only minor increases in fees and costs under the new regulations.

very significant products. According to pharmaceutical consultant Syamala Ariyanchira, 12 out of 19 leading orphan drugs had just one approval for a niche disease but became blockbusters by expanding their labels or increasing off-label use.
The Orphan-Drug Leaders

As a group, biotech firms own the most orphan-drug designations. But big-pharma firms own three of the top four spots: Novartis, Glaxo, and Pfizer. These firms are leading the way into the development of orphan drugs.

Firms That Hold the Most Orphan-Drug Designations, 1983–2009
1 2 3 4 5 6 7 8 9 Roche RHHBY Pfizer PFE GlaxoSmithKline GSK Novartis NVS Amgen AMGN Merck MRK Johnson & Johnson JNJ AstraZeneca AZN Genzyme GENZ 50 48 46 44 30 29 28 25 23 22

10 Bristol-Myers BMY
Source: Food and Drug Administration, Morningstar.

much more favorable pricing for mainstream drugs. Government payers are also demanding better drug prices to reduce health-care budgets. But in this hostile environment for prices, the price tags for orphan drugs have remained high. Unlike the treatment options for more-common diseases, orphandisease therapies often have no viable alternatives, making demand very inelastic. And orphan drugs typically treat life-threatening or debilitating diseases, where the value of treatment is very high. Another reason why orphan drugs can earn big profits is that effective drugs can expand a patient base just by treating the disease. If

no treatment options exist to pull patients and physicians forward, diseases can appear to be more rare than they are. As new treatments emerge, reported incidence rates can increase. For example, when Novartis introduced its cancer drug Gleevec, it targeted 50,000 patients with chronic myelogenous leukemia. Largely based on the success of Gleevec to treat the disease, the number of patients using the drug has grown to 120,000. Launching an orphan drug for a rare disease also can lead to treatments of related but more widespread diseases as the drug gains legitimacy. This “label expansion” opens the door for orphan drugs to develop into

Novartis is well ahead of the curve in turning orphan-drug designations into approved, profitable drugs. Several of the company’s most important drugs were launched with orphan status, including Zometa, Gleevec, Sandostatin, and Exjade. Each of these drugs became a blockbuster after starting out with a small patient base, but strong pricing power and high efficacy boosted their market potential. The drugs now represent more than 16% of Novartis’ total sales. Novartis is also developing franchises around its orphan therapeutic areas. Because of its work with chronic myelogenous leukemia and Gleevec, the firm’s understanding of the science behind the disease led to the

30 Morningstar Advisor August/September 2010



Morningstar Advisor - August/September 2010

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2010

Morningstar Advisor - August/September 2010
Contents
New on MorningstarAdvisor.com
Contributors
Letter From the Editor
What Aspects of Health-Care Reform Will Most Affect Your Clients?
Bonds, Chicago Style
Investment Briefs
Which Risk Are You Managing?
Eye on the Prize
Advisors Can’t Rely on Fidelity Alone
Health Care Gets Back to Business
An Opportune Time to Bet the Pharm
Reform’s Impact on Other Health-Care Industries
Top Takeover Targets in Biotech
After Reform, Narrow-Moat Firms Have Strong Prospects in Diagnostics
Health-Care Investing Alive and Well
Quest for Knowledge
Four Picks for the Present
How to Make Your Bond Portfolio Inflation-Resistant
Weeding Through the Energy Patch
Uncertainty and Value in Basic Materials
Stock Market Doom-Busters
Hunting Down European Debt-Dodgers
Mutual Fund Analyst Picks
50 Most Popular Equity ETFs
Undervalued Stocks With Wide Moats
VA Sales Slip a Bit in First Quarter
New at Morningstar
Star Wars, the Sequel
Morningstar Advisor - August/September 2010 - Morningstar Advisor - August/September 2010
Morningstar Advisor - August/September 2010 - Cover2
Morningstar Advisor - August/September 2010 - 1
Morningstar Advisor - August/September 2010 - 2
Morningstar Advisor - August/September 2010 - Contents
Morningstar Advisor - August/September 2010 - 4
Morningstar Advisor - August/September 2010 - 5
Morningstar Advisor - August/September 2010 - New on MorningstarAdvisor.com
Morningstar Advisor - August/September 2010 - 7
Morningstar Advisor - August/September 2010 - Contributors
Morningstar Advisor - August/September 2010 - Letter From the Editor
Morningstar Advisor - August/September 2010 - What Aspects of Health-Care Reform Will Most Affect Your Clients?
Morningstar Advisor - August/September 2010 - 11
Morningstar Advisor - August/September 2010 - Bonds, Chicago Style
Morningstar Advisor - August/September 2010 - 13
Morningstar Advisor - August/September 2010 - Investment Briefs
Morningstar Advisor - August/September 2010 - 15
Morningstar Advisor - August/September 2010 - Which Risk Are You Managing?
Morningstar Advisor - August/September 2010 - 17
Morningstar Advisor - August/September 2010 - 18
Morningstar Advisor - August/September 2010 - Eye on the Prize
Morningstar Advisor - August/September 2010 - 20
Morningstar Advisor - August/September 2010 - 21
Morningstar Advisor - August/September 2010 - Advisors Can’t Rely on Fidelity Alone
Morningstar Advisor - August/September 2010 - 23
Morningstar Advisor - August/September 2010 - 24
Morningstar Advisor - August/September 2010 - 25
Morningstar Advisor - August/September 2010 - 26
Morningstar Advisor - August/September 2010 - Health Care Gets Back to Business
Morningstar Advisor - August/September 2010 - An Opportune Time to Bet the Pharm
Morningstar Advisor - August/September 2010 - 29
Morningstar Advisor - August/September 2010 - Reform’s Impact on Other Health-Care Industries
Morningstar Advisor - August/September 2010 - 31
Morningstar Advisor - August/September 2010 - 32
Morningstar Advisor - August/September 2010 - Top Takeover Targets in Biotech
Morningstar Advisor - August/September 2010 - 34
Morningstar Advisor - August/September 2010 - 35
Morningstar Advisor - August/September 2010 - After Reform, Narrow-Moat Firms Have Strong Prospects in Diagnostics
Morningstar Advisor - August/September 2010 - 37
Morningstar Advisor - August/September 2010 - 38
Morningstar Advisor - August/September 2010 - 39
Morningstar Advisor - August/September 2010 - 40
Morningstar Advisor - August/September 2010 - Health-Care Investing Alive and Well
Morningstar Advisor - August/September 2010 - 42
Morningstar Advisor - August/September 2010 - 43
Morningstar Advisor - August/September 2010 - 44
Morningstar Advisor - August/September 2010 - 45
Morningstar Advisor - August/September 2010 - 46
Morningstar Advisor - August/September 2010 - 47
Morningstar Advisor - August/September 2010 - 48
Morningstar Advisor - August/September 2010 - Quest for Knowledge
Morningstar Advisor - August/September 2010 - 50
Morningstar Advisor - August/September 2010 - 51
Morningstar Advisor - August/September 2010 - Four Picks for the Present
Morningstar Advisor - August/September 2010 - 53
Morningstar Advisor - August/September 2010 - How to Make Your Bond Portfolio Inflation-Resistant
Morningstar Advisor - August/September 2010 - 55
Morningstar Advisor - August/September 2010 - 56
Morningstar Advisor - August/September 2010 - 57
Morningstar Advisor - August/September 2010 - Weeding Through the Energy Patch
Morningstar Advisor - August/September 2010 - 59
Morningstar Advisor - August/September 2010 - 60
Morningstar Advisor - August/September 2010 - Uncertainty and Value in Basic Materials
Morningstar Advisor - August/September 2010 - 62
Morningstar Advisor - August/September 2010 - 63
Morningstar Advisor - August/September 2010 - Stock Market Doom-Busters
Morningstar Advisor - August/September 2010 - 65
Morningstar Advisor - August/September 2010 - Hunting Down European Debt-Dodgers
Morningstar Advisor - August/September 2010 - 67
Morningstar Advisor - August/September 2010 - Mutual Fund Analyst Picks
Morningstar Advisor - August/September 2010 - 69
Morningstar Advisor - August/September 2010 - 70
Morningstar Advisor - August/September 2010 - 71
Morningstar Advisor - August/September 2010 - 50 Most Popular Equity ETFs
Morningstar Advisor - August/September 2010 - 73
Morningstar Advisor - August/September 2010 - Undervalued Stocks With Wide Moats
Morningstar Advisor - August/September 2010 - 75
Morningstar Advisor - August/September 2010 - VA Sales Slip a Bit in First Quarter
Morningstar Advisor - August/September 2010 - 77
Morningstar Advisor - August/September 2010 - 78
Morningstar Advisor - August/September 2010 - New at Morningstar
Morningstar Advisor - August/September 2010 - Star Wars, the Sequel
Morningstar Advisor - August/September 2010 - Cover3
Morningstar Advisor - August/September 2010 - Cover4
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