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Health Care: Obamacare M&A Trumps Weak Earnings Outlook

Deutsche Bank expects average revenue growth of 17.6% in the second quarter (up from 8.0% in the first quarter) due to Medicaid expansions, while average EPS is expected to decline by 13.1% due to a nearly 50% average decline for Medicaid MCOs.

Fidel said Aetna's current share prices may already reflect an earnings per share miss, signaling that a reported EPS of $1.26 -- the current Wall Street consensus -- could drive shares higher. He expects a second quarter earnings miss from Health Net and notes that among Medicaid-exposed names, WellCare may contain the biggest earnings surprise after Molina and Coventry Healthcare pre-announced negative revisions.

The Obamacare M&A chatter shouldn't obscure the fact that health care companies were busy before the decision putting together mega-mergers to position themselves for key earnings opportunities, amid the prospect that profit margins fall throughout the health care sector.

"There is a very basic level of consolidation that is taking place," Marc Cabrera, head of the health care investment banking practice at Morgan Joseph TriArtisan, said in a late June interview that came before the court's ruling.

Cabrera highlighted a consistent drum of mergers among physician practices, hospitals and pharmacy benefits managers (PBMs) -- -- the companies that fill drug prescriptions -- as indicative of the needs for companies in the health care sector to grow their scale in the face of margin pressures.

In June, Walgreen's (WAG) acquisition of European pharmacy giant Alliance Boots highlighted big changes to the earnings prospects for drug store and PBMs.

Last October, Cigna (CI) bought HealthSpring (HS), a health care provider with a big pharmacy unit, in a near doubling of its PBM business.

Cabrera pointed to recent deals like dialysis specialist DaVita's (DVA) $4.42 billion acquisition of privately held physician practice HealthCare Partners and Humana's acquisition of hospital chain Concentra in 2010 as signs of the health care sector in an M&A mode of scaling operations.

For more on healthcare M&A, see why Obamacare isn't the sole trigger for dealmaking and why M&A among drug stores and pharmacy giants like Express Scripts (ESRX) could underestimate synergies in the sector.

-- Written by Antoine Gara in New York

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