Walgreen’s strong balance sheet has enabled it to grow its business through acquisitions even in the midst of recession. The company generated $852 million in the fourth quarter and $4.1 billion for the year in cash flow from operations, an increase of 55% and 35%, respectively driven by strong drugstore performance, including improved working capital. At the end of the last quarter, Walgreen had $2.1 billion in cash and cash equivalents. We had expected earlier that the company would use the available funds for suitable acquisitions as well as rewarding its shareholders with generous dividend payments.

In order to make the best use of available resources, Walgreen has scaled down its plan of opening stores from the current level of 9% to 4.5%-5% in 2010 and 2.5% - 3% in fiscal 2011. This is evident from the decline in opening of new stores during the quarter. During the fourth quarter, the company opened 149 new drugstores compared with 162 in the third quarter and 199 in the year-ago quarter. We believe this decision will benefit the company as new stores take 2-3 years to become profitable.

The current economic scenario is a major challenge for Walgreen but we expect it to withstand it based on its strong cash balance and vast network of retail stores. The current U.S. government’s agenda of reforming the healthcare system will affect the company on its margin and reimbursement front. However, the inclusion of about 47 million uninsured people under the insurance net will increase the prescription volume manifold, which should help boost the top-line. We have a Neutral rating on the stock.

Philips Healthcare to bolster chronic disease management in China

Philips (PHG) and project HOPE, which aims at providing education and solutions to health problems, announced a joint effort to support major hospitals and community healthcare centers in China to deal with chronic diseases. Philips' Healthcare division will provide technical knowhow as well as finance part of the program costs. The program will focus on heart diseases, stroke and respiratory ailments.

This project aims to develop infrastructure as well as capacity of medical care centers to provide long-term treatment to patients suffering from these diseases. Philips will provide training as well as advanced facilities to the centers under this collaboration. Patients will receive guidance on skills for self-administered care to ensure a healthier lifestyle.

According to report published by the Ministry of Health, chronic diseases such as coronary heart disease, stroke, and chronic obstructive pulmonary disease are major causes for death in China. However, the healthcare system is not sufficiently geared up to meet the challenge.

Moreover, the level of public education and awareness about the typical risk factors need to be enhanced. On an average, only one-fourth of the chronic disease patients utilize the facilities at community healthcare centers. The challenge facing healthcare reformists in China is spreading awareness and quality healthcare services at the micro level.

We remain bullish on Philips.

Headquartered in Mountain View, CA, Omnicell Inc. (OMCL) founded in 1992, develops and markets end-to-end automation solutions for the medication-use process.

These automation solutions contain medication and supply dispensing systems, central pharmacy storage, retrieval and packaging solutions, a bedside automation solution, a physician order management solution, a decision support application, and a Web-based procurement application. These solutions enable healthcare facilities to acquire, manage, dispense and deliver pharmaceuticals and medical supplies, as well as enhance patient safety, reduce medication errors, improve workflow, and increase operational efficiency.

The rise in information technology (IT) investment by healthcare providers, coupled with a gradual modernization of the healthcare system, has created a demand for automated healthcare management systems. Moreover, due to the nature of the untapped markets in which OMCL operates, the company has a tremendous growth opportunity from these markets in the coming years.

The $10 billion automated systems market, which the company caters to through its Omnicell PharmacyCentral and SafetyPak products, is only one-fourth penetrated. We believe the company is well-poised to expand its presence in these under penetrated markets. Furthermore, the automated systems market has historically shown a growth rate between 10% and 15%, with OMCL exceeding the industry.

The company's first-quarter results were poor with lower revenue and EPS. The present economic turbulence has negatively affected the company's revenue. However, the U.S. government's recent moves to approve more than $20 billion in spending on healthcare IT can boost OMCL.

The company is presently trading at a P/S multiple of 1.7x for 2009, higher than the industry mean of 1.1x. We are comfortable applying a P/S multiple of 1.8x for OMCL and arriving at a target price of approximately $11.50. We reiterate `Hold' rating for this stock.

On other side, opponents of cap-and-trade say that this will raise the cost of coal, which will be passed on to the consumer, making it a tax. Opponents also say that it will make coal less competitive, reducing the demand for coal and eliminating mining jobs over time.

With regard to cap-and-trade, the President's current goal would be to instate a market-based system of carbon emission credits. Credits would most likely be auctioned off with a set "cap" of government-mandated carbon in that given year. Companies would bid on credits based on their expected needs. Companies who emit more than they had in carbon credits for would face fines or other penalties, while companies who emit less could sell their unused credits on the open market (the "trade").

Advocates say:

• Cap-and-trade will give certainty to future costs of energy.
• Government revenues would help decrease national debt levels.
• Revenues collected could be used to fix the healthcare system.
• "Polluters Pay" - revenues collected from the auctions would be used to invest in domestic clean energy and create new jobs in clean/renewable energy space.
• This will help in decreasing U.S. dependence on foreign oil.
• The cap-and-trade system will force the U.S. to develop efficient energy technologies of the future.

• Without international support, the U.S. coal industry will be at a competitive disadvantage.
• Some estimate that the cap-and-trade system would increase each gallon of gasoline by $0.12 and will increase the average electricity bill by 7%.
• It transfers wealth from the country's interior to the coasts and other states in the form of lower taxes and other subsidies.
• Revenues that the government makes on CO2 auctions wouldn't be redirected to taxpayers, but rather would be used to fund social programs.
• In mining-centric regions of the U.S., namely Appalachia, the coal mining industry employs a significant amount of people. Lower coal demand would create job loss.
• The government has taken a position that will negatively impact our most abundant, cheapest form of energy.

When President Obama's administration released the proposed budget for the upcoming fiscal year, drug stocks quickly dropped. Fears of socialized medicine, or "Hillary-Care 2.0" turned investors away from the sector.

Was the drop warranted?

There are 6 key components to healthcare reform that could have a meaningful impact on pharmaceutical and biotechnology companies in the near future.Four of these are potentially negative, whereas the other 2 are potentially positive.

First Potential Negative: Increasing Pricing Rebates

The new proposal calls for an increase in Medicaid rebates from the current level of 15% to 21%. This equates to a 6% decrease in pricing power by all the companies in our universe into the Medicaid market. If we delve deeper into the ramification of this action, we see that the potential earnings impact for most large pharmaceutical companies is in the area of 1%, at most.

Most pharmaceutical companies average roughly 5% to 20% of their U.S.business to Medicare / Medicaid. Some companies, including Wyeth (WYE), Pfizer (PFE), and Abbott Labs (ABT) are on the low-end, whereas others, such as Bristol-Myers Squibb (BMY), Eli Lilly (LLY), Merck (MRK), and Gilead (GILD) are on the high-end.

The overall impact to the top-line is muted significantly for companies with greater sales outside the U.S., including PFE, ABT and Johnson & Johnson (JNJ).

Notice Abbott and Pfizer are on the right side of that list twice, low exposure to Medicaid, high percent of sales outside the U.S. But nevertheless, we would classify the 1% EPS risk associated with increased pricing rebates as mostly bark, only a tiny bite.

Segment Analysis For Top Drug Companies
Company	% U.S. Revenues*	Est. % Govt. Biz	% At Risk Exposure
Abbott Labs	48%	~8%	~4%
Bristol-Myers	59%	~14%	~9%
Johnson & Johnson	51%	~9%	~5%
Merck & Co.	56%	~10%	~6%
Schering-Plough	30%	~8%	~3%
Eli Lilly & Co.	54%	~18%	~10%
Pfizer, Inc.	42%	~6%	~3%
Wyeth, Inc.	47%	~5%	~2%
*Revenues include all operations, not just Pharmaceuticals

Second Potential Negative: Biologic Generics

It is clear that we will have some sort of path to approval for generic biologic drugs, or "biosimilars," in the near-future. New draft legislation is expected to call for 10 years of market data exclusivity for new biologic drugs - a victory for the biotech industry as Representative Henry Waxman (D-CA), Chairman of the House Energy and Commerce Committee, recently introduced a bill calling for only 5 years of data exclusivity.

But biosimilars will not be as devastating to biotech products as generics were to small molecules. Manufacturing biologic drugs is significantly more cost prohibitive and knowledge intensive than small molecules.

Biotechnology companies themselves often struggle with manufacturing scale-up and meeting demand. Manufacturing Eli Lilly's Erbitux or Amgen's (AMGN) Enbrel is no easy task. There are few generic manufacturers with the necessary expertise, or capital required, to manufacture large batches of biosimilars.

And, there are significant additional hurdles. If the FDA will require proof of bioequivalency, then generic manufacturers will need to start doing costly large-scale clinical trials - something most will shy away from doing. Conversely, if the FDA does not require a bioequivalency study, we believe most doctors will shy away from using the "biosimilar" products because they know the complexity of the manufacturing process and have no proof that the generic Aranesp really is identical to the branded Aranesp.

It's a catch-22 that generic companies looking to break into the biologic market will have to deal with.

That being said, firms with potentially the biggest risk exposure to generic biologic legislation include Amgen and Biogen Idec (BIIB). Teva Pharmaceuticals (TEVA) is most likely the biggest winner.

Top Biologic Drugs And Their Patent Expiration
Neupogen (Amgen)	2013	Neulasta (Amgen)	2015
Aranesp (Amgen)	2014	Enbrel (Amgen)	2012
Myozyme (Genzyme)	2016	Fabrazyme (Genzyme)	2015
Herceptin (Roche)	2019	Avastin (Roche)	2018
Rituxan (Roche)	2018	Lucentis (Roche)	2018
Erbitux (Eli Lilly)	2017	Remicade (J&J)	2014
Humira (Abbott)	2016	Synagis (AstraZeneca)	2018

Third Potential Negative: Drug Reimportation

A consortium of 4 Senators (Dorgan D-ND, Stabenow D-MI, McCain R-AZ, and Snowe R-ME) introduced in early March 2009 the, "Pharmaceutical Market Access and Drug Safety Act." The bill would allow U.S.-licensed pharmacies and drug wholesalers to import FDA-approved medications from Canada, Europe, Australia, New Zealand and Japan - areas where drug prices are on average 35% to 55% lower than in the U.S. The legislation would also allow individual consumers to purchase prescription drugs for personal use from safe, reliable, FDA-inspected Canadian pharmacies.

The Congressional Budget Office (CBO) estimates the bill would save American consumers $50 billion over the next decade, including more than $10 billion in federal government savings. If we assume the savings are linear, or average roughly $5 billion per year, that represents approximately 2% of the total U.S. $250 billion pharmaceutical market. The EPS impact from a 2% haircut to the top-line of each pharmaceutical company, assuming drug reimportation hits everyone equally, is extremely manageable, and will most like average no more than 1% to 2% per company if enacted.

Fourth Potential Negative: Tax Reform

(This also the one with the most teeth.) .

Tax reform has little to do with fixing the healthcare system and more to do with closing loopholes and going after drug company's profits directly.  It is also by far the most socialistic approach to the problem, as we would classify drug reimportation and biosimilars as more capitalistic approaches.

Over the past several years large-pharmaceutical companies have gotten quite good at lowering their effective tax rates thanks to foreign subsidiaries and R&D credits. In fact, the average tax rate using the 14 largest U.S-based pharmaceutical and biotech companies in 2008 was 23%.

It is possible that the President's proposal could raise the effective rate for each firm to 30% by closing these loopholes and cutting R&D tax credits.

That equates to a 7% increase in effective tax rate for the average company, or as much as a 20% to 30% decrease in net income. The details on the tax reform aspect to President Obama's proposal have yet to be divulged, but this does have the potential to be a significant negative for our coverage universe.

2008 Tax Rates for Top U.S. Drug Companies
Abbott Labs	22%	Amgen	22%
Bristol-Myers	22%	Alcon, Inc.	15%
Genentech	36%	Biogen Idec	29%
Genzyme	34%	Gilead Sciences	27%
Johnson & Johnson	23%	Eli Lilly & Co.	21%
Merck & Co.	17%	Pfizer, Inc.	22%
Schering-Plough	15%	Wyeth, Inc.	30%

It's not all potentially bad news though with respect to healthcare reform.We see two potentially very positive changes that could emerge as a result of new legislation.

First Potential Positive: New Research Funding

In early March 2009, President Obama reversed a standing executive order from the previous administration by lifting the federal ban on human clinical testing of embryonic stem cells. This opens the door to potentially billions of dollars in government funding for this new, and potentially breakthrough, platform.

Stem cell companies, although mostly small and unprofitable, are the biggest direct beneficiary of the news. However, big pharmaceutical companies are clearly interested in stem cell research, and with a significantly more friendly administration in control, we may see a big push in this area in the coming years.

Besides opening up funding for stem cell research, the Obama administration has made it clear it wants to see additional increases in funding for infectious diseases such as HIV/AIDS and Hepatitis-C, as well as for cancer and obesity-driven diseases such as diabetes and cardiovascular disease.  At this point, similar to the proposed tax reform, the details are thin. How much money the government will spend and who will get the money remains to be seen, but Genzyme (GENZ) and Gilead would seem to be the two biggest beneficiaries of increased funding in their core areas.

Second Potential Positive: Increase Coverage

This is the "no-brainer" when it comes to how universal healthcare would benefit big drug companies. There are an estimated 40 million people living in the U.S. without health insurance. Opening up some sort of government sponsored program that would insure even half of these people would be a significant revenue driver. We would view this as a systemic benefit across the entire universe of healthcare companies.

Potentially another 20 million Americans looking to use prescription drugs could mean as much as another $25 billion in drug sales per year. That would equate to an increase of over 10% in 2010. Therefore, even if pricing drops by 6% and reimportation takes down sales by another 2-3%, the net top-line impact of Obama's healthcare reform may be negligible if the size of the target market increases.

Healthcare Reform Is Necessary

Fixing healthcare, or at least starting on a long-term solution, is at the center of President Obama's plans for the next 4 years, and for good reason.

According to the National Center for Policy Analysis, the unfunded liability associated with Medicare / Medicaid is roughly 7x that of the current unfunded liability for Social Security. By 2030, it grows to 15x the size.

Social Security may be the "third rail" in American politics, but Medicare / Medicaid is the train bearing down on the tracks.

Still Waiting on the Details

It is also critical to realize that many of the details to President Obama's proposal have yet to be ironed out. That debate will take place on the floor of the House and Senate over the next few months.

What was released last month was more a broad stroke, sweeping legislation, plan of action. The President called for a $634 billion healthcare reform reserve fund over 10 years aimed at fixing many of the problems that exist with the current system. This $634 billion is paid for through $318 billion in tax increases on Americans earning over $250,000 and $316 billion in savings to be squeezed from drug makers, hospitals and managed-care companies.

The net result of healthcare reform is likely to be limited on big pharmaceutical earnings.

As noted above, the effective tax rate change has the potential to take the biggest bite out of profits. What we may end up seeing is a small reduction in revenue growth rates for the largest firms by 2% to 4%, with almost this entire drop hitting the gross margin line. Operating margins are likely to remain stable as most of the company look to cut costs and synergize through mega-mergers (Pfizer-Wyeth, Merck-Schering, Roche-Genentech). The mega-merger trend should continue, with names like Bristol-Myers, Eli Lilly, Sanofi-Aventis (SNY), and AstraZeneca (AZN) most likely the next to jump into the fray. Net margins could take a hit if tax rates increase, which would certainly have a negative impact on earnings, but we expect that this type of broad-based impact to the entire sector will have only limited impact on applied valuation multiples.

When the President's budget is finalized we should get a better sense on how the above 6 forces will impact each name individually. At this point, the fear of healthcare reform seems entirely more bark than bite. Although there is bite, the Amex Pharmaceutical Index is now down 13% YTD, and our calculations show that the expected earnings hit, excluding the tax rate issue, is significantly less.

Wishing you luck,
Jason Napodano, CFA
Senior Analyst, Zacks Equity Research

Jason covers the pharmaceutical industry for Zacks Equity Research. His article on how health care reform may impact the drug sector helps us view certain stocks in a new light.For example, Teva Pharmaceuticals is identified as a potential big winner with new generic biologic legislation. If you'd like to see Jason's in-depth research report on TEVA issued April 1, you may download now by starting a free trial to our Zacks Premium service.

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This from Investor’s Daily Edge:

It’s finally here.  The long awaited and hard fought election will end tomorrow (at least I hope we don’t see a repeat of 2000 where we don’t know who won for weeks).  Rather than make predictions about the election itself, I want to tell you how I think things will play out after the election.

First, I think the overall market will rally after the…

Skilled Healthcare Group, Inc. provides integrated long-term healthcare services in the United States. Its nursing facilities provide such services as chemotherapy, dialysis and rehabilitation. The company has a market cap of $596 million and is headquartered in Foothill Ranch, California.

Industry Trend

With a rapidly aging domestic population applying pressure to the healthcare system, healthcare providers have seen a big up tick in demand for their services. This environmental shift was evident when Skilled Healthcare Group reported strong second-quarter earnings on Aug 5.

Revenue was up 19.3% from last year to $180.3 million. Net income increased to $8.9 million, a big jump from a loss of $4.1 million in the same quarter last year. This produced earnings of 24 cents per share, on target with analyst expectations.

Segment Growth

Revenues in Skilled Healthcare's largest business segment, long-term care services, posted very impressive gains, with revenue climbing to $159 million, a 20.4% increase form the same period last year.

Guidance Raised

During the quarterly announcement, the company also raised its 2008 full-year guidance, and now expects revenue to fall between $730 and $740 million, and earnings per share to land between 98 cents and $1.03.

The analyst community is also bullish on the company, with the next-year estimate pegged at $1.13 per share, a 12.73% earnings growth projection.

Based upon the current-year estimate, this stock is trading in line with the overall market, carrying a forward P/E multiple of 16X.

The Chart

Shares of SKH have had a great year, climbing from a low of less than $10 to a recent high-water mark above $16, a new 52-week and all-time high. More recently, this stock has traded in a tight range just below the high. A macro-level trend line is fast approaching to provide additional support. Take a look at the chart below.

"SKH" Free Stock Analysis: Buy? Sell? Hold?
Zacks Investment Research