FRANKLIN GLOBAL ADVISERS

The long-debated U.S. health care reform bill, formally known as the H.R. 4872, THE HEALTH CARE & EDUCATION AFFORDABILITY RECONCILIATION ACT of 2010, has been signed into law, and now a new chapter for the health care industry begins. The legislation is designed to extend health care coverage to more than 32 million uninsured Americans-a market expansion that could potentially benefit drug companies, hospitals, medical devices companies and even insurers, though they may face challenges as the insurance business model changes.

The health care bill, which is projected to cost $940 billion, could also potentially reduce the federal budget deficit, according to the Congressional Budget Office, as new taxes on health industries and families earning more than $250,000, along with spending cuts on Medicare, are designed to be greater than the cost of the plan. As many of these revenue-raising provisions will not go into effect for several years, there remains the possibility of unforeseen obstacles.

With health insurance and health care more accessible for individuals, it may boost the sector as large numbers of people become insured and access their coverage. Several Franklin Global Advisers portfolio managers share their views on the potential impact, and opportunities, of this legislation.

Grant Bowers, Portfolio Manager

Growth Strategy

No matter what the changes are, the end result is likely to be significantly larger numbers of people getting insurance coverage. This will likely expand the marketplace for health-related companies. For some it will be a challenge, for others it will be an opportunity. If millions more patients who are uninsured now get covered, we believe this may create a big opportunity in health care.

Uncertainties surrounding health care reform in the United States have resulted in valuations of many health care sector stocks becoming very inexpensive on a historical basis. We believe that this has created some of the best buying opportunities in U.S. growth stocks at the moment. As the market gets comfortable with the reforms, we believe some of these stocks could start to recover.

Evan McCulloch, Portfolio Manager

Health and Biotech Sector Strategy

The debate on health care reform over the past year created significant uncertainty and pressure on the health care sector. We view this as a buying opportunity as the legislative process has just crossed the finish line and clarity on the sector should now improve. The current reform bill may lead to at least $300 billion in net new spending on health care over the next ten years. We believe this may be positive for most health care sub-sectors due to expanded coverage of the currently uninsured. We believe the most notable beneficiaries of health care reform may be the hospitals and pharmacy benefit managers. Insurance companies are also likely to be net beneficiaries due to the increased pool of potential insured individuals, partially offset by increases in fees and regulation.

The passage and signing of this bill into law marks the end of the legislative process, but only the beginning of the implementation and execution process, ultimately leading to coverage expansion of the uninsured starting in 2014. With clarity on the legislative front, we expect investors to revert back to evaluating the core fundamentals of the health care sector, where the strong secular growth opportunity may lead to potential outperformance. In general, we view the health care sector as a fertile area of investment due to demographics and innovation.

Kent Shepherd, Portfolio Manager

U.S. Equity Strategy

The process of reforming the U.S. health care industry brought tremendous uncertainty and fear over the future prospects for health care-related companies and stocks. For instance, what new fees or taxes would health care-related companies be required to pay as part of the scheme to fund new insurance coverage for the uninsured? How might reimbursement rates be changed, thus potentially lowering the prices companies receive for their products and services? How might the government create a public, government-run insurance plan to compete directly with private health insurance companies? The uncertainty that these and many other questions raised have, we believe, caused many U.S. health care-related stocks to dip to some of the lowest valuations we have seen in years. Now, as the details of the actual health care bill are finalized, a lot of the uncertainty is fading, and it is becoming increasingly clear that some outstanding investment opportunities have been created by these temporary uncertainties, in our view. Greater certainty on the "new rules" might also help to marginally strengthen the U.S. labor market, as companies can now more accurately analyze the costs associated with the hiring of new workers.

Meanwhile, we also remain cognizant of the longer-term fiscal ramifications of the new health care legislation, as we feel the current plan may add to an already large U.S. government budget deficit. As a result, U.S. investors and certain households may rightly assume that the bill could potentially increase the likelihood of higher future income-tax rates, as the U.S. government struggles to balance its budget. That, in turn, could weigh negatively on households' after-tax incomes and capacity to spend, as well as affect investors' appetite for risk due to higher taxes on investment income and capital gains. We continue to stay diligent in assessing the broader effects of these policies upon the overall U.S. economy.

Posted on: 25 March 2010