Kristine Harjes: Let's hear your 30-second elevator pitch for WellCare.
Todd Campbell: Okay. WellCare gets most of their money from running Medicaid programs,
primarily in the South, so, Florida and Georgia are its two biggest markets. Those are non-expansion
states, so they don't benefit from the enrollment pop that some of their competitors may. That
being said, they've got a very ambitious goal, and it looks like they're starting to deliver
on it. That goal is to double their sales over the course of the next five years, and
to significantly boost their earnings by growing their margin from 1% today to 2% down the
road. Doubling a margin should have a very profit-friendly impact, if you will, on its
share price over that period.
Harjes: So, I definitely want to hear more about how they're planning on doing that,
but first, just for context, can you explain exactly what you mean by expansion state?
Campbell: Sure. Yeah. As part of Obamacare, states could opt in to Medicaid expansion,
which would allow Medicaid, basically, to enroll anyone who earned up to 138% of the
federal poverty level. Not all states opted in. I think 32 or 33 states decided to expand
Medicaid, the remaining states chose not to. As a result, Medicaid insurers operating in
states that expanded saw a very large increase in the number of people enrolling in those
programs, versus non-expansion states, and as a result, that drove their revenue and
profit substantially higher. I think it was Kaiser Family Foundation reported double-digit
growth in enrollment in the last fiscal year for expansion states, and maybe 5-6% growth
for non-expansion states. So, its important, obviously, to understand
that as investors, where do they get their business, and why is it growing. But in the
case of WellCare, I think investors -- I mean, they've driven this stock up 22% in the past
month, and in my view, the excitement for that is really tied to the future outlook,
the ability to grow its business through mergers and acquisitions, to be able to continue to
reach more members in the states they already serve by increasing their star ratings, which
is how a lot of people go out and select. They also have a Medicare business, a lot
of people go out and select their Medicare plans. But, I think this is an intriguing
company that is worthy of doing a little more research on for investors.
Harjes: Yeah, they're definitely a niche player with an interesting business model. Let's
turn towards Edwards Lifesciences. They're a medical device maker, they do artificial
heart valves and transcatheter heart valves in particular. What are you seeing here?
Campbell: Transcatheter heart valves are, the procedure growth is enormous. Essentially,
what we're talking about here is, we're talking about replacing heart valves in seniors or
elderly patients that wouldn't qualify for open heart surgery because of other complications
they may have. Harjes: How big of a market is that?
Campbell: It's -- I mean, it's sizable enough that this is a company that's bringing in
over $1 billion in sales. You've got the company reporting $671 million in Q4 sales worldwide
alone. So, it's a $2.4 billion run rate, $2.5 billion in 2015. And it's growing, tremendously.
Harjes: Yeah, it sounds like a pretty niche-y kind of tool. It's used for just these people
with high-risk circumstances. But then, you think about it, heart disease is America's
number one killer. So, this is an absolutely massive market to begin with. So, even once
you narrow it down to just patients that fit a certain criteria, it's still a pretty big market.
Campbell: Right. And from an investment standpoint, you've got a fairly large market, they've
got plans to try and expand this to people who are at less risk, I guess, moderate-risk
patients, if you will. So, you could get patient volume procedure growth that way, that would
drive sales and revenue higher. And, you've got a company that has a really good balance
sheet. I think they have $1.2 billion in cash, and about half that in debt. They've beat
earnings expectations in each of the last four quarters, and they're thinking that their
earnings could continue to grow substantially this year.
Harjes: Is that anything to do with the recently-implemented 2 years of suspension of the U.S. Medical
Device tax?
Campbell: That's going to provide a tailwind. Yeah, in December, it was agreed to suspend
that or delay that or however you want to phrase it, the 2.3% tax that was implemented
as part of Obamacare on medical device makers. So, you get a nice, natural tailwind there.
But, again, they've got a substantial double-digit uptake increase in sales for their transcatheter
valves. And they've got the market share dominant in Sapien product, for that treatment. So,
this is one of those situations where, I think, again, investors are saying, "We've got a
company that's growing double digits, we've got a solid balance sheet, we've got a solid
opportunity for future growth, I think that makes this a stock that's worthy of people's attention."
Harjes: Okay, let's move on to our third and final stock, IMS Health Holdings, which is
up 13% in the last month.
Campbell: Correct. IMS Health may not be well-known among the average investor, but anyone who
is in the healthcare industry is probably familiar with them. They're a huge provider
of information content across the health industry. Basically, if a drug maker has a drug, and
they want to know how it's performing in the marketplace, or they want to figure out how
better to reach doctors and educate them on the benefits of their drug, they're going
to be working with IMS to find out that information, analyze that information, and then develop
strategies to go after and grow market share. In the last year, this is a global company,
so there's been some currency headwinds, sales are up 20%, 28% if you adjust back out the
currency. So, I think you look at this company and you
say, "Well, are more drugs getting approved every year? Yes. Is the patient population
for medicine increasing? Yes. Are companies more and more interested in figuring out how
to drive market share growth? Yes." So, I mean, all of these are tailwinds that could
help IMS continue to grow into the future. That being said, it's been an acquisitive
company. They do have some debt that investors should be aware of, and of the three, this
one is maybe my #3 choice to consider for portfolios. But, that being said, take a look
at it and check it out, because shares have maintained their rally over the course of
the last month since the report, and content is important. It's key.
Harjes: So, if these guys are your #3 out of the three we just discussed -- and I'll
end with this question -- which one is your favorite pick?
Campbell: Edwards. Harjes: (laughs) That was easy.
Campbell: It has the greatest opportunity for growth, it has reasonable valuation, the
bottom line is growing nicely. I think they've got a really good market opportunity, really
good market leading product. And then, I would look to WellCare. Then, I would look to IMS.
Harjes: Alright, that was a high-conviction answer, I like it.