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Analysts: Flu may deliver limited impact to stocks

Tom Murphy, AP Business Writer

An intense flu season may be developing this winter, but analysts expect health care stocks to remain largely immune from big share price swings as the need for medical help rises.

Higher-than-normal reports of flu started cropping up in several states before Christmas, and flu-related hospitalizations also began climbing earlier than usual. Experts at the Centers for Disease Control and Prevention have warned that they see a bad season shaping up for the flu, which usually peaks in midwinter.

On average, about 24,000 Americans die each flu season, according to the CDC.

"The current cold, cough and flu season looks to be the most severe in at least the last decade and continues to intensify," analyst Edward J. Kelly said in a research note. Kelly covers pharmacies for Credit Suisse.

Flu season can help drugstore chains like Walgreen Co., CVS Caremark Corp. or Rite Aid Corp. because it brings more patients to stores to fill prescriptions or pick up disinfectants or over-the-counter symptom remedies. Kelly said an analysis of the three most severe flu seasons in the last decade shows that drugstore stocks perform well as flu activity picks up, but they then give back much of the gain in the following months.

"Given the strong performance of the sector since the flu season began in November, it seems like this catalyst may already be priced into the stocks," Kelly wrote.

The flu season's impact on drugmakers largely depends on whether they're a big vaccine maker like Sanofi or GlaxoSmithKline. They may see a bump in revenue in the last two quarters of a calendar year, but stock prices won't change much unless there is an abnormally strong outbreak like 2009's swine flu season.

"The market tends to look at heavy flu seasons as sort of a one-time event and usually doesn't reward the companies with a lot of increased valuation," said Morningstar analyst Damien Conover.

Hospital stocks tend to climb as investors anticipate more patient visits due to a bad flu season. But those shares then tend to fall back once results show that most of the patients were either uninsured or had government-funded coverage like Medicaid that offers poor reimbursement, said CRT Capital analyst Sheryl Skolnick.

Shares of several health insurers slipped Tuesday, and Bernstein analyst Ana Gupte said in a separate note fear about the flu season's intensity may have pushed the sector down.

Investors worry that a spike in flu claims can chip away at insurer profitability, especially in last year's fourth quarter and this year's first quarter. But Gupte said the share sell-off was overdone, and worst-case flu scenarios would be manageable for big, diversified health insurers like Aetna Inc. or UnitedHealth Group Inc.

Aetna Chairman and CEO Mark Bertolini said Tuesday his company has seen a spike in flu intensity following two very mild seasons. But that has been moderated by fewer hospital admissions than the insurer saw in other flu seasons. Bertolini said the insurer expects to spend between about $40 million and $50 million on flu claims this season, which is a normal range.

In contrast, the company spent $100 million in the swine flu season of 2009.

"We don't see this flu season, even at its worst, getting close to that number," Bertolini said during an appearance at J.P. Morgan's annual health care conference in San Francisco.