Tuesday, January 26, 2021
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Health-Care Companies Shake Off Disrupters, Make Deals

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Amazon CEO Jeff Bezos. Even if Amazon’s pharmacy is a success, it probably won’t transform the business of health care.

Amazon CEO Jeff Bezos. Even if Amazon’s pharmacy is a success, it probably won’t transform the business of health care.

Photo: mandel ngan/Agence France-Presse/Getty Images

Health-care incumbents are making big moves right as would-be disrupters fade away.

The new year has begun with a bang for deal makers.
UnitedHealth Group,
the largest publicly traded health insurer, announced a deal on Wednesday to buy health technology startup
Change Healthcare
for $8 billion in cash.

Pharmacy giant
Walgreens Boots Alliance
also said Wednesday that it is selling its European distribution business to drug wholesaler
AmerisourceBergen
for $6.5 billion in cash and stock. Both Walgreens and AmerisourceBergen shares surged on Wednesday. And insurer Centene said on Monday it plans to acquire mental-health-care specialist Magellan for $2.2 billion.

It won’t be surprising if more deals materialize soon: The annual
J.P. Morgan
health conference, which historically has been a preferred moment for splashy announcements, is scheduled for next week.

The shopping spree coincides with the dissipation of potentially disruptive threats that have spooked Wall Street in the past. Haven Health, a venture aimed at reducing health costs backed by
JPMorgan Chase,
Berkshire Hathaway
and
Amazon.com,
is folding roughly three years after its formation, The Wall Street Journal reported earlier this week. Haven’s arrival caused a selloff for insurance stocks back in 2018. Despite the fanfare and pedigree, the group found American health care too hard of a nut to crack.

That is no surprise. While high health costs make the sector attractive for would-be disrupters, navigating the labyrinthine regulations that govern patient care is a huge challenge that leaves incumbents with a significant advantage. That reality is a hefty constraint for even the strongest potential competitor. For example, Amazon launched an online pharmacy in November. But it is joining with a subsidiary of Express Scripts, the pharmacy benefits giant which is owned by the health insurer Cigna, to administer the savings benefit for Amazon Prime members. If Amazon’s pharmacy is a success, it would likely take market share from retail pharmacies, but that probably won’t transform the business of health care.

The threat to share prices from Washington, D.C., also has subsided. Democrats took control of Congress with two runoff victories in Georgia earlier this week. But their razor-thin advantage in the Senate makes comprehensive health reform a remote possibility any time soon, especially with the pandemic still raging.

Meanwhile, fundamentals are still strong: Health-care utilization trends have returned to near-normal conditions after massive coronavirus-related disruptions in 2020. And the continuing demand for Covid-19 testing, vaccines and therapeutics present meaningful growth opportunities across the industry. Long-term demographic tailwinds such as an aging population remain intact. That should lead to steady earnings growth throughout the sector.

That strong fundamental outlook is paired with mostly reasonable valuations. Health stocks have rallied about 13% over the past year, lagging behind the S&P 500 by about 3 percentage points. Walgreens, which reported fiscal first quarter results that topped Wall Street expectations on Thursday, trades at about 9 times the current adjusted earnings forecast. That is a sharp discount to the overall market, despite a 30% rally in its shares since late October. UnitedHealth fetches a reasonable 21 times this year’s earnings forecast and has earned a reputation for regularly exceeding its guidance.

That is plenty of reason for Wall Street to start its New Year on a health kick.

Write to Charley Grant at charles.grant@wsj.com