Did Morgan Stanley get it wrong on health care? The big investment firm recently published its “20 for 2016” report highlighting stocks that it thinks will perform the best over the next few years. Since health care makes up more than 17% of the gross domestic product of the U.S., you might expect that three or four stocks from the sector would be in this top 20 list. That wasn’t the case. Only one health-care stock made the Morgan Stanley ranking: Gilead Sciences .  

Why weren’t there more health-care companies? The biggest reason is that Morgan Stanley wasn’t trying to balance its stock picks by industry representation. The company stated that its focus was on “sustainability — of competitive advantages, business model, pricing power, cost efficiency, and growth.”

That approach sounds reasonable. And Gilead was a great pick based on those criteria. However, I still suspect that health care was underrepresented. Here are three companies that probably should have made Morgan Stanley‘s list.

If we’re looking for a sustainable business model, pharmacy benefits management, or PBM, stands out as a great one. With the Centers for Medicare and Medicaid Services projecting that annual prescription drug spending will increase nearly 75% by 2021, the demand for services to help control these costs should grow. As the largest PBM in the country, Express Scripts sits in the catbird seat for this flourishing industry.

Express Scripts‘ size gives it several competitive advantages. The company can use its heavy purchasing volume to negotiate better deals with pharmaceutical companies than smaller rivals can. Express Scripts‘ economies of scale allow it to drive down costs, particularly in process-intensive areas such as mail-order drug delivery. The company also benefits significantly from its accumulation of data garnered by processing 29% of retail pharmacy prescriptions. This data allows it to develop more effective programs to control drug costs for its customers.

What about growth? Express Scripts‘ revenue more than doubled over the past year and increased by nearly 50% over the last three years. Granted, much of that growth stemmed from the company’s 2012 acquisition of Medco. However, Express Scripts also grew its bottom line by 4% and 5% over the past year and last three years, respectively, even with the big costs of the Medco deal. Those numbers are better than several of the companies included on Morgan Stanley‘s top 20 list.

Morgan Stanley picked a great biotech with Gilead. However, they omitted another impressive player in the industry — Celgene. When it comes to growth, Celgene actually looks better in several metrics. The company’s revenue jumped nearly 28% over the last three years compared to Gilead’s 11% growth. Celgene’s earnings per share likewise soared by 28% during this period, while Gilead increased earnings per share by 5%.

Celgene’s primary drug, Revlimid, targets multiple myeloma and myelodysplastic syndromes, or MDS, both of which are bone marrow diseases. Revlimid is the top-selling drug for those indications and continues to experience solid …read more
Source: FULL ARTICLE at DailyFinance