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Drug pricing growth will slow, healthcare M&A should surge, Morningstar says

Obamacare changes could cut the number of insured patients, creating more risk in the healthcare market.

Beth Jones Sanborn, Managing Editor

Drug pricing pressure from pharmacy benefit managers is likely to help slow price hikes in 2017, a new report by investment research firm Morningstar claims.

On the other hand, Donald Trump's administration will bring big changes to the Affordable Care Act such as the elimination if the insurance mandate, converting Medicaid into block grants and relaxing regulations across the board, Morningstar's director of healthcare equity research and equity strategy Damien Conover said,

"These changes will likely reduce the number of insured patients, which is generally a negative for the healthcare market, but the loosening regulations should help offset this negative."

[Also: Pharmacy benefit managers face crackdown on drug pricing]

Continued pressure on drug pricing coming from pharmacy benefit managers should help slow drug pricing growth, but it will also affect drug stock valuations.

Morningstar also said the research-and-development landscape is speeding up the generation of data in high demand areas like oncology. For instance, some new cancer drugs are being driven to market at half the time it would have taken 10 years ago. Morningstar said this is due in part to major advancements in science and clinical designs, but can also be attributed to increased flexibility from healthcare regulatory groups.

"We expect the shift to continue and to increase drug-development productivity and strengthen the moats for drug companies, especially as the productivity gains are in areas of unmet medical need that hold strong drug pricing power and steep launch trajectories."

[Also: More than 50 million adults with pre-existing conditions would lose coverage in wake of Obamacare repeal, Kaiser study says]

Finally, when it comes to capital finance, the report predicted healthcare companies will continue to maneuver, buying back shares and purchasing other firms and companies "as cashflow generation looks robust, but increased growth is needed from acquisitions."

Merger-and-acquisition trends will surge as cheap capital is available to fund acquisitions thanks to lower interest rates. Experts will be looking for a lowering of the U.S. corporate tax rate by the new administration, which would mean international profits would not be as hampered by tax losses and could drive even more merger-and-acquisition activity, Morningstar said.

Twitter: @BethJSanborn

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