Investors are underappreciating the moaty nature of the healthcare supply chain and the formidable competitive advantages that have insulated these firms.
03:22 PM | Email Article
, Berkshire Hathaway
, and JPMorgan Chase
announced on Jan. 30 that the trio will form an independent healthcare company to help control healthcare costs for their U.S.-based employees.
Vishnu Lekraj is a senior equity analyst for Morningstar.
While there could be some potential given the capital and clout of the three partners, we believe certain investors are underappreciating the moaty nature of the healthcare supply chain and the formidable competitive advantages that have insulated its major players. All potential new competitors would face significant headwinds trying to break into any vertical along the chain because the dynamics of the healthcare market are very difficult to navigate.
Speculation that Amazon, Berkshire, and JP will disrupt the space by leveraging their impressive capital war chest and business expertise has caused valuations of the PBMs, MCOs, drug wholesalers, and retail pharmacies to fall materially. We believe the recent downward move in stock prices creates an opportunity for investors to acquire solid wide-moat firms at discounts, and we would highlight Express Scripts
, and Cardinal Health
as being particularly good opportunities.
While the exact operating structure, products/services, and ultimate mandate for the partnership are yet to be developed, these partnerships have been tried before by sizable corporations and businesses without any major change within the healthcare marketplace. The capital and management clout of the three partners is undoubtedly great; however, their core-competencies are not healthcare related, and it will take significant time for a legitimate operation to develop.
Additionally, we believe a potential new partnership would lack the scale and size to provide efficiencies and pricing power on par with the major healthcare services firms. This is especially the case given the local density necessary to obtain decent provider pricing and the sourcing joint ventures among the retail pharmacies, drug distributors, and pharmacy benefit managers.
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