I understand there's plenty of animosity toward the sector because of high branded-drug prices and a long, drawn-out, drug development process, but there are five reasons why health care represents your best investment choice over the coming decade rather than traditionally strong sectors like technology or financials.
(1) There is one primary reason why research costs are contributing to
better drugs coming down our pipeline: Big technological advancements
over the past decade.
Drug research all begins in the lab. According to the U.S. National
Institutes of Health, there are more than 140,000 clinical studies
currently under way. This figure has ballooned since 2000 as higher
quality genome-sequencing equipment and better in-lab instrumentation
has allowed researchers to conduct significantly more studies for the
same previous cost.
The chart above means a big boost in human genome sequencing demand for Life Technologies (NASDAQ: LIFE)
. Life Tech introduced its Benchtop Ion Proton Sequencer in January
last year for a price of just $149,000 and touted its ability to sequence the human genome in a single day
for just $1,000. Previous versions had cost anywhere from
$500,000-$750,000 and took weeks or months to sequence the human genome
at a cost of $5,000 to $10,000 a pop.
As you can see, human genome sequencing costs have dropped through the floor,
falling from north of $95 million in 2001 to less than $7,700 as
recently as January 2012. The introduction of Life Technologies'
Benchtop Ion Proton Sequencer should send these costs heading even
DNA sequencing is becoming increasingly important in cancer research, as
sequencing tumors can lead to personalized therapy. Scientists at the
Washington University School of Medicine in St. Louis, Mo., for
instance, had fully sequenced 700 cancer patients' genomes,
including healthy and cancerous cells, as of April last year, according
to Science Daily. The lower cost of genome mapping and faster
turnaround time will speed up the process of identifying mutations and
could offer personalized cancer therapies in the not-so-distant future
as opposed to a "one-size-fits-all" therapy.
Considering that health-care research budgets are only expanding, genome
sequencing costs are falling, and that the sheer number of clinical
studies being undertaken is rising, I can only assume that the next
decade will see FDA approvals at a well-above-average rate than in the
(2) The Congressional Budget Office released a long-term budget forecast in
June 2009 that projected that the cost of Medicare -- which is social
health-care coverage offered to those age 65 and older, as well as
younger people with disabilities -- would practically double from 3.5%
of GDP in 2009 to 6.9% of GDP by 2035, about six years after the last
group of boomers retires. Even more pressing, better treatments and
healthier eating habits are greatly extending the lives of retirees
beyond just the age of 65.
All facets of the health care sector appear likely to benefit from this
trend of longer life -- from hospital and insurers, to pharmaceutical
companies and medical device makers geared toward an aging population.
One company that really stands out is Medtronic (NYSE: MDT)
. If we simply extrapolate out the fact that cardiovascular diseases
are the leading cause of death in this country based on PhRMA's
research, then a dramatic jump in those aged 65 and older should lead to
a large boost in pacemakers, stents, and valve replacements -- all
markets that Medtronic operates in. Another area of solid growth that
should be spurred by boomers is spinal implants, an area where Medtronic
is the head honcho.
(3) Regardless of whether you support the Affordable Care Act,
one thing is for certain: It will bring millions of uninsured Americans
under the fold of government-sponsored Medicaid. As I noted, the baby
boomers were one of the hardest-hit groups during the recession, so they
may be one of the primary beneficiaries of the beginning of Obamacare
Obamacare definitely has its share of critics, but it's expected to
bring approximately 16 million newly insured Americans under the scope
of government-sponsored health care. These are people who previously
either avoided going to the doctor unless absolutely necessary or put
holes in the pockets of hospitals because of their inability to pay
their health care service costs. In addition, Obamacare mandates
individuals to carry -- and businesses to provide -- health insurance or
face potential tax penalties on a per-person basis.
Not surprisingly, no group of companies stands to benefit more from the streamlining of the health-care process more than hospitals. HCA Holdings (NYSE: HCA)
, the nation's largest hospital operator, can, as a result of
Obamacare, expect its bad-debt provision to fall dramatically. This
should ultimately free up funds that can be used in other aspects of its
business -- including acquisitions, funding future hospital
construction, purchasing new medical equipment, and perhaps even paying
shareholders a dividend.
(4) One of the biggest threats of the technology sector is that everything
is slowly being commoditized. From memory to assembly line parts, many
technical components can now be duplicated with ease, placing long-term
downside pressure of many technology companies' margins. The same can't be said about the majority of health-care companies.
The effects against commoditization are even more readily apparent in medical device makers. Intuitive Surgical (NASDAQ: ISRG)
, manufacturer of the da Vinci surgical system, offers the only
commercially profitable surgical robotic system. Period! With few
competitors on the horizon and an incredibly complex technology, I'd say
its market share is safe for quite a long time.
(5) Some of the most basic illnesses continue to go untreated in
emerging-market countries around the globe and offer a jumping-off point
for growth beyond just domestic markets.
One company that's taking the bull by the horns in expansion abroad is Merck (NYSE: MRK)
. Merck's annual report, filed earlier this month, demonstrates that it
now generates 57% of its total revenue abroad. Burgeoning growth
markets like India and China are where Merck's investment dollars are
currently headed, with opportunities seen in cholesterol and diabetes
medications, which are highly contested and largely saturated (no pun
intended) in the United States.