4 Reasons to Be Optimistic About Healthcare: Express Scripts Holding Company (ESRX), WellPoint, Inc. (WLP), Eli Lilly & Co. (LLY)

In last month’s brief earnings call, Express Scripts Holding Company (NASDAQ:ESRX) CEO George Paz happily announced a better than expected outlook for the 2013 fiscal year. The company provided guidance on 2013 earnings of $4.20-$4.30 per share, while analysts were expecting the extreme low-end of the guidance.

Paz noted the company’s outlook is bolstered by the positive outlook of the healthcare industry as a whole based on several key factors: an aging population, healthcare reform, the introduction of new specialty drugs, and the expiration of patents on name brand drugs. Here, I’ll examine each more in-depth, and see exactly how these trends stand to benefit Express Scripts Holding Company (NASDAQ:ESRX) among other healthcare companies.

Aging population

The Congressional Research Service released a report in 2011 documenting the expected rise in the elderly population of the United States. Within 12 years, the survey expects nearly 18% of all Americans will be aged 65 or older. By 2050, the research service expects the population of age 80 and above citizens will reach 7.4%.

Most importantly, the report claims the number of people in poor health is “almost certain to rise.” The benefits to the healthcare industry of a growing drug-reliant population should be self-evident. The effect of increased drug prescriptions will benefit everyone from drug makers, to pharmacies, and, of course, pharmacy benefit managers like Express Scripts.

Healthcare reform

The Patient Protection and Affordable Care Act won’t take effect in 2014, but that doesn’t mean you can’t use that knowledge to invest now. The big winners in my opinion are Medicaid-based insurers such as Molina Healthcare, Inc. (NYSE:MOH) and Centene Corp (NYSE:CNC). That’s why we’ve seen a number of big acquisitions lately such as WellPoint, Inc. (NYSE:WLP) acquiring Amerigroup (to become the largest Medicaid-based insurer) and Aetna purchasing Coventry Health.

The sudden influx of newly insured patients will help ease the margin pressure Medicaid insurance specialist companies have faced in recent years. Last year Centene took a loss, and Molina posted an operating margin of just 0.6%. For wide-based insurers there is a pricing risk as Medicaid enrollees are generally very low margin customers.

Express Scripts Holding Company (NASDAQ:ESRX) stands to gain as a PBM through its largest customer, WellPoint, Inc. (NYSE:WLP). WellPoint made it clear that it aims be the market leader in Medicaid enrollment when it announced plans to acquire Amerigroup. Additionally, the pricing pressure will help attract new customers to PBMs such as Express Scripts as companies look to contain costs.

New specialty drugs

Specialty drug treatments is a booming industry. Spending on specialty medications for diseases like rheumatoid arthritis, hepatitis C, and cancer rose 18.4% last year. The industry accounted for near one-quarter of total drug spending in 2012.